The Cotton Sector of Zimbabwe - World Bank Documents

The Cotton Sector of Zimbabwe Africa Region Working Paper Series No. 122

February, 2009

Abstract

his country study is a background paper prepared for the comparative analysis of organization and performance of cotton sectors in Sub-Saharan Africa, a

study carried out by the World Bank, with the objective of analyzing the links between sector structure and observed performance outcomes and drawing lessons from reform experience, in order to provide useful guidance to policy-makers, other local stakeholders, and interested donor agencies. It describes and reviews the cotton sector situation in Zimbabwe, where a major change in the structure of the sector occurred around 2001-03. Zimbabwe thus provides a natural experiment in increasing the degree of competition in an already liberalized sector, that holds lessons for the structuring of cotton sectors across Africa in the future.

Following liberalization in 1994, the sector was run by an effective duopoly of Cottco, the privatized ex-parastatal, and Cargill. It made a smooth transition from a production system based on large-scale commercial farms to one almost entirely reliant on smallholder production. A seasonal loans scheme run by Cottco allowed smallholder producers to

achieve mean yields that were impressive by southern and eastern African standards, if modest by the standards of Francophone Africa. The sector also maintained its historic reputation for high quality lint during the transition. Since the onset of economic crisis in 2001, the number of firms participating in the cotton sector has increased rapidly. This is partly because there are so few alternative ways of generating foreign exchange in the economy and partly because of the pricing decisions made by Cottco and Cargill between 2001 and 2003. Since 2001 cotton companies have had to grapple with the challenges of operating in a highly dysfunctional and distorted economy. However, the biggest challenge to the future of the sector has come not from these day-to-day operational difficulties, but from the changing dynamics resulting from the rapid entry of new players into seed cotton buying and ginning. The paper investigates the impacts of increased competition on lint quality, credit provision and seed cotton pricing. The change in sector structure requires a corresponding change in sector regulation, but to date this has been at best partially addressed.

Author Affiliation and Sponsorship

Colin Poulton, Centre for Development, Environment and Policy School of Oriental

and African Studies, University of London, UK Colin Poulton <[email protected]>

Benjamine Hanyani-Mlambo, Department of Agricultural Economics,

University of Zimbabwe, Harare

[email protected]

The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with

potential for improving economic performance and social conditions in Sub-Saharan Africa. The Series publishes

papers at preliminary stages to stimulate timely discussion within the Region and among client countries, donors,

and the policy research community. The editorial board for the Series consists of representatives from professional

families appointed by the Region’s Sector Directors. For additional information, please contact Paula White,

managing editor of the series, (81131), Email: [email protected] or visit the Web site:

http://www.worldbank.org/afr/wps/index.htm.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they

do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries

they represent and should not be attributed to them.

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COMPARATIVE ANALYSIS OF ORGANIZATION

AND PERFORMANCE OF AFRICAN COTTON SECTORS

The Cotton Sector of Zimbabwe

Prepared for the World Bank by

Colin Poulton Centre for Development, Environment and Policy

School of Oriental and African Studies

University of London, UK

and

Benjamine Hanyani-Mlambo Department of Agricultural Economics

University of Zimbabwe

Harare

February 2008

i

Aknowledgements

his country study is a background paper prepared for the comparative analysis of

cotton sector reform in Sub-Saharan Africa, a study carried out by a World Bank

team led by Patrick Labaste (SD Department, Africa Region, World Bank) and

including David Tschirley (Michigan State University), Colin Poulton (SOAS,

University of London), Nicolas Gergely (consultant), John Baffes (DEC, World Bank),

Duncan Boughton (Michigan State University), and Gérald Estur (marketing and

quality consultant). The report was edited by Grant Cavanaugh (J.E. Austin

Associates).

The study was funded by the World Bank and by contributions from bilateral trust

Funds, particularly from Belgium (BPRP), the Netherlands (BNPP/CRMG), and the

Swiss Secretariat for Economic Affairs (CRMG), as well as by the All-ACP

Agricultural Commodities Programme (AAACP) of the European Union

This report presents findings from work undertaken in 2007, at which point Colin

Poulton was part of the Centre for Environmental Policy, Imperial College London. In

turn, this built on work undertaken for the DFID-funded project "Competition and

Coordination in Cotton Market Systems of Southern and Eastern Africa". The

observations and conclusions in the paper reflect the situation prevailing within the

Zimbabwe cotton sector in 2007. However, the authors believe that the findings of this

paper have enduring relevance.

The authors are grateful to all the farmers, ginners and other stakeholders who gave

their time to be interviewed by the authors. Particular thanks go to John Battershell for

commenting on an earlier version of the report.

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Contents

1. Introduction ...................................................................................................................... 6

2. Historical Background and Reform Process .................................................................. 7

2.1. The Zimbabwe Cotton Sector Prior to Liberalization .............................................. 7 2.2. Liberalization ........................................................................................................... 9

3. Overview of the Cotton Sector ....................................................................................... 10

3.1. Key Macro-Economic Factors Affecting the Sector .............................................. 10 3.2. Seed Cotton Production .......................................................................................... 13 3.3. Areas Cultivated and Yields ................................................................................... 14 3.4. Seed Cotton Purchase and Ginning ........................................................................ 17 3.5. Lint Export ............................................................................................................. 20 3.6. Domestic Textile Industry ...................................................................................... 22 3.7. Oil Sector ............................................................................................................... 23 3.8. Transport Services .................................................................................................. 24

4. Current Institutional Arrangements and Performance .............................................. 25

4.1. Regulation of the Zimbabwe Cotton Sector ........................................................... 25 4.2. Public Investment in the Cotton Sector .................................................................. 28 4.3. Research and Extension ......................................................................................... 28 4.4. Seed Production and Supply .................................................................................. 31 4.5. Access to Fertilizers and Chemicals ....................................................................... 32 4.6. Quality Control ..................................................................................................... 37 4.7. Pricing of Seed Cotton ........................................................................................... 41

5. Cost Competitiveness, Returns to Producers and Sustainability ............................... 46

5.1. Processing and Marketing Costs in Zimbabwe ...................................................... 46 5.2. Cost Competitiveness at Farm Level...................................................................... 47 5.3. Return to Farmers and Poverty Alleviation Considerations ................................... 49 5.4. Sector Sustainability ............................................................................................... 52

6. Competition vs Coordination ......................................................................................... 54

6.1. Quality Premia, Input Support and Other Determinants of the Ability to Pay for

Seed Cotton ............................................................................................................ 54 6.2. Proposed Arrangements for the 2007 Harvest ....................................................... 56

7. Lessons Learned ............................................................................................................. 58

8. Appendix Tables ............................................................................................................. 61

9. References ........................................................................................................................ 73

List of Tables

Table 1: Disaggregating Area Planted and Yield Amongst Smallholder Cotton Producers...... 16 Table 2: Cotton Buying and Ginning Companies in Zimbabwe (1994 – 2007) ........................ 19 Table 3: Contrasting Estimates of Zimbabwe Lint Exports ....................................................... 22 Table 4: Release Dates and Key Characteristics of Recommended Cotton Varieties. .............. 29 Table 5: Fertiliser Application by Cotton Farmers with/without Credit .................................... 33 Table 6: Inputs Supplied 2006/07, by Company and Farmer Type ........................................... 35 Table 7: Seed Cotton Prices and Producer Shares of c.i.f. Lint Price, 1990-2006 .................... 42

iii

Table 8: Assessing Seed Cotton Pricing within the Post-Liberalization Zimbabwe Cotton

Sector .......................................................................................................................... 45 Table 9: Analysis of Costs and Returns from Farmer Budgets (US$) ....................................... 48 Table 10: The Impact of Selected Policy Changes on Company Profitability and Ability to Pay

for Seed Cotton ........................................................................................................... 55

List of Figures

Figure 1: Seed Cotton Production in Zimbabwe.......................................................................... 9 Figure 2: Zimbabwe Real Exchange Rate and A Index Lint Price, 1990-2006 ......................... 11 Figure 3: Area Planted by Smallholder Cotton Producers and Yield ........................................ 14 Figure 4: Area Planted to Cotton by Large-Scale Commercial Farmers and Yields ................. 15 Figure 5: Meet Shares of Zimbabwe Cotton Firms, 1995/96 – 2003/04 ................................... 20 Figure 6: Exports of Cotton and Tobacco Products from Zimbabwe ........................................ 21 Figure 7: Average premium/discount over the A Index ............................................................ 39 Figure 8: Proportion of Seed Cotton Purchased by Motmate Designs ...................................... 40 Figure 9: Real Seed Cotton Price and Exchange Rate Adjusted Lint Price, .............................. 42 Figure 10: Seed Cotton Prices Paid in Muzarabani and Guruve Districts .................................. 44

iv

Abbreviations

AFC Agricultural Finance Corporation

AMA Agricultural Marketing Authority

CCGA Commercial Cotton Growers Association

CFU Commercial Farmers’ Union

CMB Cotton Marketing Board

CRI Cotton Research Institute

D&PL Delta and Pineland

GMB Grain Marketing Board

ICFU Indigenous Commercial Farmers’ Union

NACGMB National Association of Cotton Ginners, Merchants and Buyers

NCC National Cotton Council

NFU National Farmers’ Union

RBZ Reserve Bank of Zimbabwe

ZFC Zimbabwe Fertilizer Company

ZFU Zimbabwe Farmers’ Union

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Executive Summary

imbabwe and Tanzania compete to be the largest cotton sector in southern and eastern

Africa. After liberalization in 1994, Zimbabwe’s cotton sector was dominated by two

firms, Cottco and Cargill who set the strategic direction for the sector.

With the onset of economic crisis in 2001, the number of firms participating in the cotton

sector increased rapidly. The increase in the number of ginners, some of them either quite

opportunistic or used to operating in less quality-conscious sectors than Zimbabwe’s,

undermined the informal coordination which had sufficed for Cottco and Cargill’s

development of the sector during the 1990s. Credit provision and quality control are the

two areas that have been most affected. There is a real danger that Zimbabwe will lose its

hard-earned reputation in international markets for high quality cotton lint.

Zimbabwe provides a natural experiment in increasing the degree of competition in an

already liberalized cotton sector. It thus holds lessons for the structuring of cotton sectors

across Africa in the future.

The main impact of macro-economic instability on the cotton sector has been through

changes in the real exchange rate. Zimbabwe’s case dramatically highlights the importance

of the real exchange rate on the profitability and performance of a commodity sector such

as cotton. The initial fall in the real exchange rate created conditions whereby companies

could increase profits (albeit under considerable uncertainty), as the benefits of the

exchange rate change were not passed onto producers. Prior to this, producers had received

a very high share of world lint prices. The high profits that companies reaped during 2001-

2003 sent a signal that encouraged many other companies to enter the sector. Continued

falls in the real exchange rate mean that Zimbabwe’s sector remains cost competitive in US

dollar terms, despite inevitably higher costs arising from the demands of operating in a

highly distorted and unstable macro-economic environment. In addition, some of the

current distortions within the Zimbabwe economy, such as artificially low electricity prices

and loans from commercial banks at negative real interest rates, also help keep costs down.

Thus, the number of companies continues to increase.

In turn increased competition for seed cotton has had a major negative impact on seed

cotton and lint quality (section 4.6). In section 6.2 we provide some explanation for this:

the profits that companies can obtain from pursuing a “high input, high quality” strategy

amongst their smallholder growers are not as high as those that can be obtained from free-

riding on input provision by others, even if the free-riding firm then receives a lower price

from its lint sales. In the absence of strong incentives for new firms to maintain quality,

competition for seed cotton has led to quality control measures being de-emphasised. An

initial impact of increased competition was to increase the number of company-run input

credit schemes and hence credit access for producers. However, increased competition has

also intensified side-selling of seed cotton, which makes it more costly for companies to

offer credit. Increased competition has raised seed cotton prices – a fact that is appreciated

by producers - but the impact on average seed cotton prices has not been as strong as might

be expected. We attribute this to the fact that the two main firms still control around 80

percent of the market (Figure 5). New firms would have to be larger and financially

stronger than they are now to raise the average seed cotton price received by producers

season by season.

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6

1 . I n t r o d u c t i o n

Zimbabwe is among southern and eastern Africa’s largest cotton producers (competing

with Tanzania) and was, until recently, the regional standard bearer for quality (Baffes

2001). During the 1990s the sector made a smooth transition from a production system

based on large-scale commercial farms to one almost entirely reliant on smallholder

production. A seasonal loans scheme run by Cottco, the ex-parastatal and largest player

in the sector, was at the heart of this transition, allowing smallholder producers to

achieve yields that were impressive by southern and eastern African standards, if

modest by the standards of Francophone Africa. The sector maintained its historic

reputation for high quality lint during the transition.

Following liberalization in 1994, the sector was run by an effective duopoly of Cottco

and Cargill. While the state retained an ownership stake in Cottco until 2001 and the

Ministry of Agriculture participated in the National Cotton Council, the informal

regulatory forum for the sector, the strategic direction for the sector was effectively set

by the two dominant firms. With the onset of economic crisis in 2001, the number of

firms participating in the cotton sector increased rapidly. This was partly because there

were so few alternative ways of generating foreign exchange in the economy and partly

because of the (arguably short-sighted) pricing decisions of Cottco and Cargill between

2001 and 2003. Since 2001 cotton companies have had to grapple with the challenges

of operating in a highly dysfunctional and distorted economy, characterised by

shortages of foreign exchange and many basic items (e.g. fuel – even cash to pay

farmers) and by enormous uncertainties surrounding all aspects of business operation.

However, the biggest challenge to the future of the sector has come not from these day-

to-day operational difficulties, but from the changing dynamics resulting from the rapid

entry of new players into seed cotton buying and ginning.

The increase in the number of ginners, some of them either quite opportunistic or used

to operating in less quality-conscious sectors than Zimbabwe’s, undermined the

informal coordination that guided the sector during the 1990s. Credit provision and

quality control are the two areas that have been most adversely affected by this new

entry. Concerned with side-selling of seed cotton, Cottco dramatically scaled back their

provision of seasonal credit to smallholder producers in the 2004/05 production season.

This contributed significantly to the 40 percent fall in Zimbabwe’s total 2004/05

production1. Cottco has since expanded its credit provision again, but side-selling

remains a major issue. With regards to quality, the proportion of lint from established

companies that achieves top grades has fallen dramatically, while the initial quality of

lint produced by some of the newer companies has been very poor. There is a real

danger that Zimbabwe will lose its hard-earned reputation in international markets for

high quality cotton lint.

By 2004 it was clear to many observers, as well as existing players, that a new

regulatory framework was required to guide the expanded sector. Concerned members

of the National Cotton Council prepared a draft set of new regulations for presentation

to the Minister of Agriculture, but neither these nor any amended version have yet been

1 2004/05 was also a poor season weather-wise, whereas the 2003/04 harvest had been one of the highest

on record.

7

given legal backing. Instead, for the 2006/07 production season, companies are being

required to provide pre-harvest support to producers and to sell 30 percent of their lint

to domestic spinners as conditions for receiving an export permit2. The recently formed

National Association of Cotton Ginners Merchants and Buyers has prepared guidelines,

based on the 2004 draft regulations, to which it expects cotton companies to adhere if it

is to recommend that they be given an export permit in the future. The possible impact

of this emerging regulatory system for 2006/07 is discussed later in this report.

Meanwhile, seed cotton production has stagnated after strong expansion during the

1990s. Recurring droughts – a perennial problem for the Zimbabwe sector – have not

helped here and nor has a national shortage of fertilizers. However, the sector’s internal

organizational problems, perhaps best illustrated by the contraction in Cottco’s credit

scheme in 2004/05, are also partly to blame. The additional entrants into the sector

have undoubtedly injected more competition into seed cotton price setting, but input

costs have also been rising and credit has become increasingly important for input

access. As part of the plan to improve input access in 2006/07, competition in seed

cotton pricing may be curtailed.

In summary, Zimbabwe since 2001 provides a natural experiment in increasing the

degree of competition in an already liberalised cotton sector. Zimbabwe’s example can

thus inform future sectoral restructuring across Africa. There are clearly challenges

from extra competition as well as possible benefits. Can the benefits from increased

competition be captured without undermining the very foundations of the sector’s

previous success? If so, how?

2 . H i s t o r i c a l B a c k g r o u n d a n d R e f o r m P ro c e s s

2.1.The Zimbabwe Cotton Sector Prior to Liberalization

The state played an active role in the early development of the cotton sector, ensuring

that cotton was a profitable crop for white commercial farmers. Unlike in Tanzania,

there was an unbroken history of central state control over both support services to

cotton farmers (including a strong cotton research program and effective extension) and

the ginning and marketing functions. In turn, the effective performance of these

functions by the state was ensured by the strong commercial farmers’ lobby in the

country.

Indigenous cotton was grown in some areas of what was then Southern Rhodesia at the

end of the nineteenth century. During the early 1900s, the first research trials were

conducted by the British South Africa Company using seed from Egypt, Brazil, the

United States, and Peru. Commercial production of cotton began in 1923 and a cotton

research station was set up in Kadoma in 1925. Early research (up to 1950) focused on

effective pest control methods. This included varietal selection for resistance to jassids

and bollworms and the development of appropriate cultural practices. The early 1950s

saw the introduction of Albar breeding stock from Uganda, starting with Albar 49 in

1952. Albar 637, introduced in 1959-60, was particularly high yielding. Combined with

2 This latter condition is not new, but there are signs that it will be enforced with new vigour in 2006/07.

8

breakthroughs in chemical control of red bollworm achieved during the 1950s, this

paved the way for a rapid expansion of production in the 1960s (Mariga 1994).

In the 1970s, the breeding program was divided into four, focusing respectively on

middle, highveld and lowveld3 (irrigation) medium staple, and long staple cotton.

Continuous emphasis on the careful use of pesticides in combination with appropriate

cultural practices kept the average number of sprays in Zimbabwe below those

recorded in other countries with comparable yields (Mariga 1994).

A Cotton Research and Industry Board, established in 1936, was responsible for both

research and marketing. The first ginneries were built in 1943, while spinning mills

were set up in 1951. Later, the responsibility for marketing was given to the Cotton

Marketing Board (CMB), a parastatal that operated as a monopoly (Hanyani-Mlambo

et al. 2002). In 1967 the Agricultural Marketing Authority (AMA) was set up to

coordinate the CMB and other major parastatals. AMA’s governing board had 50

percent representation from the Rhodesian National Farmers’ Union. In 1976, AMA

began to announce minimum guaranteed cotton prices prior to planting (Rukuni 1994).

Attractive prices remained a feature of the sector until the late 1980s, when a

requirement to provide subsidized lint to the domestic textile industry became

increasingly burdensome to CMB.

At Independence, the broad thrust of agricultural policy was to extend service support

from commercial farming areas into communal areas, where most smallholders live. In

the 1980s cotton research focused on moisture conservation, simpler pest scouting

methods and breeding for good performance under low management regimes. At the

same time, there was an expansion in the number of CMB depots in communal areas

from five in 1980 to sixteen by 1985. Together with attractive prices in the early 1980s,

this encouraged the initial smallholder production growth seen in Figure 14. During the

1980s the Agricultural Finance Corporation (AFC) was also actively lending to better-

off farmers in communal areas. This support collapsed around the end of the decade

under a burden of bad debts. Nevertheless smallholder cotton farmers soon found

alternative support through the CMB credit scheme, established in 1992 with financial

assistance from the World Bank.

CMB remained a generally effective and well-run organization through the 1980s.

From 1983 onwards, however, it was directed to provide lint to the domestic spinning

industry at prices below export parity. At the end of the 1980s, the price of lint paid by

domestic spinners was less than 60 percent of the average price received for exports.

Less than half of national cotton production was exported, compared with 80 percent in

1980. This restricted the prices that CMB could afford to pay to producers and the

producer price of cotton fell (in much the same way as the maize price did) from 1985

till 1990 (Jansen and Rukovo 1992). As a result, the number of commercial farmers

growing cotton began to decline. Commercial production of seed cotton peaked around

200,000 tons in 1987/88 and had fallen to one third of this level by the early 1990s

3 The Highveld is the central spine of the country, running southwest to northeast, with an elevation of

1200m and above and occupying about 25 percent of the country’s land area. Either side of this, the

middleveld has an elevation of 900-1200m and occupies around 40 percent of the country’s land area.

The lowveld is found in the south and north of the country (elevation below 900m). The main cotton

growing area within the lowveld is around Triangle in the south. 4 According to Takavarasha 1994, the number of registered cotton growers increased from less than

90,000 in 1980 to 215,000 in 1987.

9

(Figure 1). By contrast, cotton production by smallholders, who did not have access to

the higher value alternatives that were open to commercial producers, continued to rise.

By the end of the 1980s, over 50 percent of national production was accounted for by

smallholders. Despite this rise, it took more than a decade for national production to

surpass its 1987/88 peak.

As part of a wider program of economic reforms, CMB was granted formal managerial

autonomy in 1991. It abolished the subsidy on lint sales to domestic spinners, increased

the proportion of lint that went to export markets, raised producer prices and made

profits during 1990 and 1991. However, domestic spinners again lobbied the

government for preferential treatment. Subsidised sales were revived in 1992 and CMB

again made losses (Jansen and Rukovo 1992; Larsen 2002).

Figure 1: Seed Cotton Production in Zimbabwe

Seed Cotton Production in Zimbabwe, 1981-2006

0

50000

100000

150000

200000

250000

300000

350000

400000

80/8

1

82/8

3

84/8

5

86/8

7

88/8

9

90/9

1

92/9

3

94/9

5

96/9

7

98/9

9

00/0

1

02/0

3

04/0

5

Year

mt Commercial

Smallholder

Sources: CSO, Crop Forecasting Committee, Cottco

Notes: “smallholder” unhelpfully combines communal, resettlement and small-scale commercial

farmers (however, the main component is communal farmers); large-scale comprises production by

large-scale commercial farmers and on estates owned by the parastatal ARDA.

In Zimbabwe cotton is planted in November-December and the majority of the harvest is marketed

during May-June.

2.2.Liberalization

Liberalization began in 1994. In this year, CMB’s statutory monopoly in purchasing,

ginning, marketing and export of cotton was removed and a new company, the Cotton

Company of Zimbabwe Ltd (hereafter Cottco) was launched to take over its

commercial functions. The former parastatal was first commercialized, with the

government assuming most of the debt carried over from CMB in 1995, and then

privatized in October 1997. (It was listed on the Zimbabwe Stock Exchange on

December 1st 1997). However, the government retained a 25 percent share holding

until 2001. Prior to 2001, therefore, the government remained the biggest single

shareholder (The Cotton Company of Zimbabwe Ltd 2001).

10

In the first two seasons following liberalization, two new ginning and marketing

companies entered the market: the US transnational Cargill and Cotpro. Cotpro was

formed by a consortium of large-scale commercial cotton producers and the investment

arm of the Commercial Cotton Growers Association (CCGA). Its formation was born

out of frustration with the policy of subsidizing the domestic textile industry

immediately prior to liberalization. Initially it ginned seed cotton at the CCGA-owned

ginnery in Triangle5 on a contract basis, but built its own ginnery at Chinhoyi, in a joint

venture with Copaco and CFDT of France, in 1998/99 (Larsen 2002). Cottco bought a

controlling stake in Cotpro in 2000.

Cargill purchased two ex-CMB ginneries from Cottco in February 1996 (Larsen 2002).

Cargill has remained the main competitor to Cottco throughout the past decade, with a

market share generally around 20-25 percent.

The orderly privatization of CMB to form Cottco, combined with the limited

competition in the buying and ginning arenas in the 1990s, meant that the tradition of

strong, “centralized” service provision to cotton farmers survived into the liberalization

era. This, however, has been challenged since 2001/02 and much of the rest of the

paper will focus on the institutional dynamics of the newly competitive sector.

3 . O v e r v i e w o f t h e C o t t o n S e c t o r

3.1.Key Macro-Economic Factors Affecting the Sector

Since 2001 cotton companies have had to grapple with the challenges of operating in a

highly dysfunctional and distorted economy, characterised by rampant inflation (over

1000 percent p.a. in 2006), shortages of basic items and enormous uncertainties

surrounding all aspects of business operation. Fuel supplies have been uneven for

several years, so cotton companies have to import fuel on behalf of transporters with

whom they work and at times even on behalf of local fertilizer blending companies6.

During the 2003 buying season, cash itself was scarce throughout Zimbabwe. Cargill is

believed to have increased its market share considerably during this year, as they were

the first company to issue their own temporary “bearer cheques”, which became

accepted within local rural economies in lieu of cash (Hanyani-Mlambo and Poulton

2004).

The entrance of new companies into the cotton sector for the purpose of securing scarce

foreign exchange for their other, core operations indicates that cotton companies are in

a better position than companies in other sectors of the economy to cope with the

prevailing macroeconomic difficulties. Nevertheless, uncertainties over the exchange

rate and exchange rate policy loom large for cotton companies. Figure 2 shows that the

variation in the real exchange rate since 2000 has been almost as great as the variation

in the A index lint price throughout the entire post-liberalization period, even though

the A index price itself is considered highly volatile.

We discuss pricing in more detail in section 4.7. However, we note in passing here that

the huge depreciation in the real exchange rate during 2001 and 2002 (when foreign

5 Prior to liberalization, this ginnery ginned as an agent for CMB (Larsen 2002).

6 Cottco are believed to have received priority in allocation of scarce fertilizer in 2006/07 because they

provided the blenders with fuel to undertake their blending operations.

11

exchange scarcity had begun to be felt, but hyper-inflation was only just beginning to

take off) greatly increased the ability of cotton companies to pay attractive seed cotton

prices. In fact, seed cotton prices were modest in real terms during these years. As a

result, Cottco posted record profits and the rate of new entry into the sector increased

exponentially.

Inflation accelerated during 2003, such that by January 2004 the year-on-year increase

in the consumer price index had reached 623 percent. A concerted effort was made to

control inflation during 2004, such that this figure had fallen to 133% in December

2004. However, the introduction of an official auction for foreign exchange in January

2004 also slowed the fall in the Zimbabwe dollar, with the result that there was actually

an appreciation in the real exchange rate during 2004 (Figure 2). Since mid-2005

inflation has been rising again and has been above 1000 percent p.a. since April 2006.

However, perhaps partly due to the abandonment of the auction system, the gap

between the official and parallel foreign exchange rates has also widened dramatically

and the net effect has been another depreciation in the real exchange rate.

Figure 2: Zimbabwe Real Exchange Rate and A Index Lint Price, 1990-2006

Zimbabwe Real Exchange Rate and A Index Lint Price,

1990-2006

0.00

0.50

1.00

1.50

2.00

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

A In

dex P

rice

0.00

2.00

4.00

6.00

8.00

10.00

12.00R

eal E

xch

an

ge R

ate

A Index Price(US$/kg)

Real ExchangeRate (1990ZW$/US$)

Source: authors’ calculations based on data from ICAC, RBZ, US Bureau of Labour Statistics and

private records

Notes:

1) Here and elsewhere in this report, an effective exchange rate is calculated for all years after 2001. This

is a weighted average of official and parallel rates, the weighting changing over time according to

changes in the foreign exchange retention rules.

2) For years prior to 2001, the exchange rate used is an annual average figure (average exchange rate

prevailing during the year, deflated by annual change in CPI). From 2001, when precision in dates

becomes more important due to spiralling inflation, we use the (average) exchange rate prevailing during

the month of July, deflated by the change in CPI during the 12 months to July. July is chosen because it

is when much of Zimbabwe’s seed cotton is purchased, thereby facilitating later analysis of seed cotton

prices.

3) The quoted A Index price is the annual average for the year beginning August 1st, i.e. the average

price at which companies may expect to sell the resulting lint.

12

As well as movements in the real exchange rate, rules governing foreign exchange

retention by exporting companies are an additional source of uncertainty. For many

years, exporting companies have been required to remit a proportion of all foreign

exchange receipts to the Reserve Bank of Zimbabwe (RBZ), where they are exchanged

into Zimbabwe dollars (ZW$) at the official exchange rate (Ndlela and Robinson

2007). The remainder they are allowed to keep in foreign currency accounts, which is

generally taken to mean that this money can command at or close to the parallel market

rate. As the ratio of the parallel exchange rate to the official exchange rate has varied

from 1.0 to 31.8 since January 2001 (average = 5.2)7, the proportion of their revenue

that companies are allowed to keep in foreign exchange is an important determinant of

their profitability. There have been several changes in the rules governing retention

since 2001. In addition, since 2005 it has been made somewhat more difficult for

companies to access and freely use the proportion (currently 70 percent) that is kept in

foreign currency accounts. During the 2005 seed cotton marketing season, RBZ made a

supplementary payment to cotton producers on top of the price paid by the cotton

companies, in tacit recognition of the fact that cotton companies were unable to freely

access their foreign currency earnings at a reasonable rate and hence were unable to

make a satisfactory payment to producers.

Just as some cotton companies have been able to turn agile responses to shortages

within the Zimbabwean economy to their short-run competitive advantage, so others

have been able to obtain competitive advantage from both successful speculation on

foreign exchange rate movements and unequal access to foreign exchange. An example

of the former is that some companies paid high prices for seed cotton in July 2006,

speculating that a large real devaluation of the currency would occur following the six-

monthly monetary policy statement by the Governor of RBZ in August 2006. This

indeed happened (even though the currency was revalued, with three zeros being taken

off) and they were able to recover their high seed cotton prices through lint sales that

benefited from the devaluation.

The fact that some companies are able to obtain competitive advantage in the market

for seed cotton through unequal access to foreign exchange is a serious point of

contention for the established companies. Some of the newer entrants into the sector

registered their operations under export processing zone rules, which until July 2006

entitled them to retain as foreign currency all the foreign exchange that they generate8.

In simulations in section 6.1 we attempt to show the impact of this preferential

treatment on a company’s ability to pay for seed cotton. From a cotton industry

regulatory perspective, such preferential treatment is hard to justify. It means that

competition within the industry is conducted only partially on the basis of proficiency

in cotton production and marketing. Thus, poor technical management may not be

penalized as it should be by market forces or, conversely, high proficiency in cotton

production and marketing is not fully rewarded.

Finally, we note from Figure 2 that, while the largest movements in the real exchange

rate have taken place since 2001, they have not been restricted to this period. In

particular, there was a large devaluation of the real exchange rate in 1998, which

usefully increased the seed cotton price that companies could pay farmers. High seed

7 In February 2007 the ratio was around 20:1.

8 However, EPZ rules also require that 80 percent of a company’s production is exported. This clashes

with the requirement that the cotton sector has tried to impose since 2006 that 30% of lint produced is

sold to domestic textile firms (at subsidized prices).

13

cotton prices in the final years of the 1990s undoubtedly contributed to the large

increase in production observed during this period.

3.2.Seed Cotton Production

According to ICAC data, Zimbabwe ranked as the 5th

largest lint producer in Africa in

2004 and the 12th

largest in 2005.

Figure 1 showed trends in seed cotton production in the country since Independence in

1980. Although total production has fluctuated quite considerably, as a result both of

droughts (1981/82, 1982/83, 1991/92, 1994/95, 2001/02, 2004/05) and of policy, a

striking trend throughout the period has been the rising share of national output

accounted for by smallholder producers. In the first few seasons after Independence,

smallholders accounted for 20-25 percent of seed cotton production. By 1990, this

share was around 50 percent. By 1999/2000 (i.e. prior to the economic and political

crisis), it was 85 percent and still rising, as smallholders continued to take up the crop,

but large-scale commercial farmers exited cotton for more profitable alternatives (such

as export horticulture). Since 2002/03 large-scale cotton production in Zimbabwe has

been negligible, accounting for less than 1 percent of national output.

Most of the major smallholder cotton growing regions of Zimbabwe are found either to

the west of Harare (Gokwe, Sanyati) or to the north (Guruve, Muzarabani, Mt.

Darwin). An exception is Checheche, which is in the south-east lowveld. Historically,

the large-scale commercial sector (Chinhoyi, Rafingora and Mazowe) was also located

in the north of Zimbabwe, albeit closer to Harare than the smallholder areas. This

pattern reflected the pattern of white settlers taking the best land closest to the capital

and communal farmers being dispersed to the peripheries of the country. Some large-

scale cotton was also grown under irrigated conditions in the Triangle area close to the

Limpopo border with South Africa.

Growth in smallholder production during the 1990s was driven by the development of

the Cottco credit scheme and by active promotion of the crop in smallholder areas,

most notably Gokwe, an area that experienced a wave of new settlement following

public efforts to control the tsetse fly.

In 2001/02 there were an estimated 250,000 to 300,000 smallholder cotton growers in

Zimbabwe (Hanyani-Mlambo et al. 2002). The population of Zimbabwe at this time

was around 12.5 million9, of whom 65 percent lived in rural areas. With an average of

5.5 people per household in communal areas, this means that up to 20 percent of rural

households may have been involved in growing cotton.

Moyo 1995 and Deininger et al. 2000 argue that even though the first cohorts of

resettlement farmers (who received their land in the 1980s) took longer than expected

to become established as strong, independent cultivators, they did in due course

become significant growers of cotton (as well as maize). Indeed, Moyo 1995 argued

that, although they only constituted 5 percent of “peasant” households, they were

responsible for 15-20 percent of national cotton production. With above-average land

holdings and labor forces plus gradually accumulated livestock holdings, they were

9 The combined effects of economic crisis, out-migration and HIV/AIDS mean that it may have fallen

slightly since then.

14

able both to exceed their own maize requirements and dedicate considerable land to

cotton.

Despite stagnant recent production, cotton companies are optimistic that, if service

delivery issues can be sorted out, farmers who have received land through the post-

2001 resettlement program have the potential to boost national cotton production in the

future. Many of the farmers on so-called A1 resettlement plots were cotton farmers in

the communal areas before receiving their new land allocation. The five hectares of

good arable land that they have received through the resettlement program is a useful

improvement over their previous holding and should allow them to plant more cotton

than they did before10

.

So-called A2 farmers have received much larger plots, but often lack the capital and

equipment to fully exploit their new holdings. However, when Cargill tried targeting

A2 farmers with offers of input credit in 2005/06, the results were disappointing – the

main constraint discouraging these farmers from growing cotton apparently being

difficulties in obtaining sufficient labour (John Battershell, pers.comm.)11

.

3.3.Areas Cultivated and Yields

Figure 3 shows estimates of area planted by smallholder producers along with the

average seed cotton yield that they have achieved.

Figure 3: Area Planted by Smallholder Cotton Producers and Yield

Area Planted by Smallholder Cotton Producers and Yield,

1980/81-2003/04

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

80/81

82/83

84/85

86/87

88/89

90/91

92/93

94/95

96/97

98/99

00/01

02/03

Year

Are

a

0

200

400

600

800

1000

1200

Yie

ld Area (ha)

Yield (kg/ha)

Sources: CSO, Crop Forecasting Committee, Cottco

10

By contrast, production in other, higher value sectors, such as horticulture and tobacco, may never

recover fully from the effects of the recent land policies. 11

Taking a wider view beyond the cotton sector, the fact that this initiative was even considered

highlights the fact that previously strong farm businesses (that in many cases had switched out of cotton

into higher value enterprises in the 1990s) have been replaced by weaker businesses that currently lack

the capital, expertise or market contacts to continue these higher value enterprises and can only access

the finance and inputs to grow cotton through a dependent, contract farming relationship.

15

Some commentators question whether yields have begun to decline in recent years,

either as soils become exhausted or production expands into more marginal areas.

However, there is little support for this as a general proposition from the data in Figure

3. Farmers whom the authors talked to during focus group discussions in Muzarabani

and Gokwe South in February 2007 noted short-term problems in obtaining fertilizer,

but provided mixed responses to questions about longer-term trends in cotton yields.

In contrast to smallholder producers, large-scale commercial producers achieved

average yields of around 1700 kg/ha during the period 1980/81-2000/01 (Figure 4).

Figure 4 also confirms that the main decline in cotton production effort by large-scale

commercial producers occurred in the late 1980s and early 1990s. From 1991/92 to

2000/01 area planted remained in the range 40-50,000 ha. However, there was a further

sharp decline with the onset of the fast-track land redistribution program in 2001. In

2001/02 an estimated 55 large-scale commercial producers grew cotton. By 2002/03

this was down to 14 (Hanyani-Mlambo et al. 2003; Hanyani-Mlambo and Poulton

2004).

Figure 4: Area Planted to Cotton by Large-Scale Commercial Farmers and Yields

Area Planted to Cotton by Large-Scale Commercial

Farmers and Yields, 1980/81-2003/04

0

20000

40000

60000

80000

100000

120000

80/8

1

82/8

3

84/8

5

86/8

7

88/8

9

90/9

1

92/9

3

94/9

5

96/9

7

98/9

9

00/0

1

02/0

3

Year

Are

a

0

500

1000

1500

2000

2500Y

ield Area (ha)

Yield (kg/ha)

Sources: CSO, Crop Forecasting Committee, Cottco

Indicative information on the distribution of areas planted and yields obtained by

smallholder producers is available both from the 2002 and 2004 farmer surveys

conducted by the DFID-funded “Competition and Coordination” project in Gokwe

South and Muzarabani Districts12

and from focus group discussions in the same

districts undertaken by the authors in February 200713

. However, the information

obtained from these two sources is not fully compatible.

12

A total of 300 households were surveyed in 2002, 150 in each district, of which 265 (88%) were cotton

producers. In 2004 only 227 of these households could be traced, due amongst other things to land

resettlement, so 73 new households were added to the sample. In 2004, 275 households (92%) cultivated

cotton. 13

Four focus group discussions, two in each district, were undertaken, with 5-7 participants in each

group.

16

As an initial exercise within the focus group discussions, the participants grouped

households in their village into three or four groups, according to the extent of their

cotton production14

. Table 1 presents average findings on area and yield by group and

compares these with data from the 2004 farmer survey. From this comparison, it can be

seen that the area figures generated by the focus group discussions are around 60

percent larger than those generated by the farmer surveys for groups 1 and 2, but

similar for group 3. According to both sources, considerable inequality exists across

groups in area planted, which (according to the focus group discussions) is not

compensated for by areas planted to other crops. This is consistent with the findings of

Jayne et al. 2003 on inequality in land holdings amongst smallholder farmers in

southern and eastern Africa more generally.

Table 1: Disaggregating Area Planted and Yield Amongst Smallholder Cotton Producers

Group Proportion

of

Households

Area

Planted to

Cotton

(ha)

Proportion of

Cultivated

Land Devoted

to Cotton

Yield

(kg/ha)

Data from 2004 Household Survey

Average Area

by Area Group

(ha)

Average Yield

by Yield Group

(kg/ha)

1 19% 6.9 64% 1623 4.3 1602

2 40% 3.1 54% 1050 1.8 949

3 40% 0.9 42% 640 0.8 445

Notes:

1) Respondents in the 2004 Household survey were asked to provide basic production statistics for the

past three years. The figures used in this table are based on average figures for each household over these

three years.

2) In three of the PRA exercises, it was explained that Group 1 households were unable to obtain

sufficient inorganic fertilizer for the entire area that they had planted to cotton in 2006. The quoted yield

figures for Group 1 are for fully fertilized acreages.

3) To generate the figures in the right-hand columns, data from the 2004 household survey were sorted

by area and by yield in turn. Groups were then determined based on the proportions given by the focus

group discussions (20%, 40%, 40%).

The yield figures generated by both data sources give a higher overall figure than the

national average data reported in Figure 3, especially when the drought year 2001/02 is

taken into consideration. Needless to say, there are wide margins of error associated

with all sources.

According to both the focus group discussions and the 2004 farmer survey, there is

considerable variation in yields achieved by different groups. This is a credible finding.

However, the main inconsistency between the two sources occurs at this point.

According to the focus group discussions, the larger farmers (group 1) are the ones who

have the resources necessary to achieve the highest yields and are also the ones best

supported by the cotton companies (Cottco especially) to do this. By contrast, the 2004

farmer survey indicates a negative, but not significant, correlation between area planted

14

This exercise was inspired by the more conventional PRA wealth ranking exercise. Villages in these

districts are small, so all households in a village were included in the exercise, identified by the name of

the household head. The number of households per village ranged from 19-52 (average 40). In all

villages, households were initially divided into three groups. However, in two of the four villages, the

group with the lowest cotton production was subsequently subdivided into two. For presentation

purposes here, these two sub-groups have been re-aggregated. Once groups were identified, a series of

questions was asked about typical household characteristics and livelihood profiles of households within

each group, as well as about their cotton production activities. Finally, a cotton production budget was

constructed for each group.

17

to cotton and yield achieved. Hence, the figures in the two right-hand columns of Table

1 are for different groupings of producers.

According to the focus groups, higher yields are a function of greater resources. All

focus groups reported that group 1 farmers have their own ploughing teams and

equipment, so can plough as soon as the rains arrive. They either have large families or

sufficient resources to hire labour for timely execution of critical cultural practices (e.g.

weeding). Because of their high production levels, they are considered creditworthy by

the cotton companies and especially Cottco, so gain access to adequate fertilizer for at

least part of their cultivated area15

. Group 2 farmers may or may not have their own

ploughing teams and equipment and cannot call on as much labour (either family of

hired) as group 1, which in large part explains the smaller acreage that they plant each

year. Perhaps more importantly from a yield perspective, only a minority of them

receive any fertilizer from cotton companies. In two of the villages, it was reported that

group 2 households who received fertilizer from Cottco were able to apply it at the

same rate as group 1 households, albeit on a smaller area16

. In another village it was

reported that those group 2 households who received fertilizer only got sufficient for

spot application on patches of lower fertility land, while in the fourth village it was

reported that none of the group 2 households had received any fertilizer in 2006/07.

Finally, group 3 and 4 households are either young couples, perhaps just starting their

families, or households with old heads. Neither can call on much labour and the former

have few assets (e.g. they have had little chance to accumulate livestock). During

2006/07, when all companies are supposed to be providing pre-harvest services to

producers, they have received minimal support (seed and perhaps one bottle of

pesticide at the time of the focus group discussions). A few have been considered

insufficiently creditworthy even for this and have had to buy seed and acquire

chemicals from group 1 farmers in exchange for a service (e.g. spraying for the group 1

household). They snatch a couple of hours for weeding late in the day, having provided

hired labour to group 1 and 2 households first.

3.4.Seed Cotton Purchase and Ginning

As already noted, for the first few years after liberalization the Zimbabwe cotton sector

was effectively a duopoly. Cottco and Cargill had common views on maintaining the

country’s reputation for high quality lint and there was an understanding that Cargill

would not buy seed cotton from farmers served by Cottco’s input credit scheme. Cottco

was the leader in seed cotton pricing, with prices set so as to provide producers with an

attractive enough return to encourage them to invest in cotton production.

According to Larsen 2002, in addition to Cottco, Cargill and Cotpro, a few other

smaller buying companies were established. These smaller companies (not named by

Larsen) never gained more than 5 percent of the market between them and mainly

operated as mobile buyers, ginning seed cotton at the CCGA-owned ginnery in

Triangle on a contract basis.

15

Reports of how much fertilizer group 1 farmers used varied by village, from one bag per acre basal

plus one bag per hectare top dressing to four bags per hectare basal plus two bags per hectare top

dressing. In the latter case, respondents explained that local farmers preferred to use the full package of

fertilizer on a proportion of their land and rely on manure alone on the rest, rather than spreading

available fertilizer more thinly across their whole planted area. 16

It was argued that these group 2 households achieved similar yields to group 1, albeit on a smaller

area.

18

The reason why Cottco and Cargill’s dominance remained largely unchallenged during

the 1990s is open to some debate and speculation. Explanations that have been offered

include:

Reluctance on the part of the Ministry of Agriculture to allow new entry,

perhaps related to the government’s continuing stake in Cottco17

;

The strong performance of Cottco and Cargill, including the attractive seed

cotton prices paid to producers and the effectiveness of Cottco’s credit scheme.

The pricing analysis presented in Table 7 (below), particularly the prices paid

during 1997-2000 as a share of the ex-ginnery value of lint, lends strong support

to this latter view.

Whatever the case, the situation has changed dramatically in recent years, as the

number of firms participating in the cotton sector has increased rapidly (Table 2).

Cottco argues that their well-publicised good performance over a number of years

eventually encouraged other companies to enter the sector18

. However, we highlight

two more immediate factors that catalysed the change. Firstly, with the onset of

economic crisis in 2001 and the expanding gap between official and parallel foreign

exchange rates, some enterprises sought new ways of generating foreign exchange,

either to purchase intermediate inputs for their core businesses or as a route to profit in

itself. Cotton provided just such an avenue for foreign exchange generation. Secondly,

the seed cotton pricing decisions taken by the established companies during 2001-03

resulted in particularly high profits (see below), which encouraged other firms to enter.

We estimate that the number of firms buying seed cotton increased from five during

1999/2000 – 2000/01 to eleven in 2002/03 – 2003/04 and seventeen in 2006/07.

Table 2 lists the companies that we are aware of. Perhaps not surprisingly, since the

onset of the political and economic crisis, most of the new entrants into the cotton

sector have been either Zimbabwean-owned or from other developing countries, rather

than major international trading companies. Levels of prior experience within cotton

industries vary, but none have a track record of operations within a highly quality-

conscious sector, such as Zimbabwe pre-2001.

17

The government did offer occasional support to Cottco during this period. For example, during the

2000/01 season the government allocated Z$300 million to Cottco’s input credit scheme. However, the

current authors have not seen any evidence that government links to Cottco led to the discouragement of

competitive entry into the cotton sector during this period. 18

As a listed company, Cottco has to publish accounts on an annual basis and, as Cottco is one of the

country’s largest companies, these are widely covered in the local media. The company’s annual reports

were also a valuable source of information on the sector as a whole. In fact, Cottco has now decided that

they were too valuable and has started to provide less information in its public reports for fear that

competitors were learning too much of commercial value from them.

19

Table 2: Cotton Buying and Ginning Companies in Zimbabwe (1994 – 2007)

Company

Name

Ownership /

Capital

Operation

Period

Own

Ginneries?

Comments

Cottco Zimbabwe 1994/95 – Nine Ongoing

Cotpro Zimbabwe /

France

1994/95 –

1999/00

Transferred to

Cottco

Ran into liquidity problems after heavy

investments in a ginnery

Cargill US 1995/96 – Three Ongoing

Tarafern /

Romsdale

Zimbabwe /

UK (Plexus)

1998/99 – One Ongoing

Chollima /

Mothercare

Zimbabwe 1999/00 –

2004/05

No Chollima was an association of indigenous

farmers. Always small; seed cotton

purchases sporadic

Farmers’

World

US 2000/01 –

2002/03

No Core business was input supply; ceased

cotton business after investment in a

fertilizer manufacturing plant

FSI Agricom Zimbabwe 2001/02 – One Company placed under reconstruction in

2003/04 largely as a result of overtrading;

subsequently subject of a management

buyout; now operating at lower level

Dynamic

Cotton (New

Cabb)

Tanzania 2001/02 – One Ongoing

IDAI

Modzone

Iran 2002/03 –

2003/04

No Textile company; foray into seed cotton

production and ginning shortlived

Bartco Zimbabwe 2002/03 –

2003/04

No No longer operational

Comtex Zimbabwe 2002/03 – No Formerly Blair Pvt Ltd

Grafax India 2002/03 – Two Ongoing

Alliance

Ginneries

Kenya 2002/03 – One Ongoing

Insing

Investments

India 2003/04 – Two Ongoing

Parrogate India 2004/05 - One Ongoing

Olam

Zimbabwe

Singapore 2005/06 - One Ongoing

Cynthesis Zimbabwe 2005/06 - No Company owned by top government

officials

ZESA

Enterprises

Zimbabwe 2005/06 - No Owned by electricity parastatal

Cottrade Zimbabwe 1998/99 – No Export agents (brokers) only until 2003/04

when halted operations due to exchange

rate appreciation; re-entered in 2005/06 as

company supporting smallholder

production and buying seed cotton on own

account

REA Zimbabwe 2006/07 No New

Relcor Zimbabwe 2006/07 No New

Armgrain Zimbabwe 2006/07 No New

Fleming Zimbabwe 2001/02 – Yes Provides contract ginning only; does not

buy cotton on own account

Source: Hanyani-Mlambo et al. 2005; Ministry of Agriculture

Ginning capacity has also increased with the entry of new firms. Hanyani-Mlambo et

al. 2005 report national ginning capacity as 600,000 tons of seed cotton p.a.19

, which

19

By 2007 this figure stood at 670,000 tons p.a. [John Battershell, pers.comm.].

20

gives a current capacity utilization rate of only around 50 percent. At this level, it is

perhaps not surprising that there is something of a scramble for seed cotton20

.

Figure 5 assembles data on market shares over the post-liberalization period. This

shows that, after an initial adjustment following the entry of Cotpro and Cargill,

Cottco’s market share remained at around 70 percent until 2001/02. However, in

2002/03 it fell to below 60 percent. Moreover, the combined share of the two main

firms fell to around 80 percent. In 2006 Cottco purchased around 130,000 tons of seed

cotton out of a total harvest of around 260,000 tons, which indicates that its market

share had fallen further to 50 percent.

Figure 5: Meet Shares of Zimbabwe Cotton Firms, 1995/96 – 2003/04

Market Shares of Zimbabwe Cotton Firms, 1995/96 - 2003/04

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1995/96 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Year

Sh

are

(%

)

Cottco

Cargill

Cotpro

FSI Agricom

Others

Sources 1995/96 estimate based on Larsen (2002)

1998/99 Larsen (2002)

1999/00-2001/02 Mlambo and Poulton (2002)

2002/03 estimate based on Mlambo and Poulton (2003)

2003/04 Mlambo and Poulton (2004)

This is still a fairly concentrated sector. However, there is now vigorous price

competition for the purchase of seed cotton, a phenomenon that did not exist in the

Zimbabwean sector prior to 2001. Moreover, as already indicated, the change in market

structure and the associated changes in market conduct have had major implications for

the provision of input credit within the sector and for the maintenance of the quality

control procedures necessary for achieving the uniform, high quality lint for which the

Zimbabwean sector has historically been renowned.

3.5.Lint Export

Up until 2000, the agriculture sector accounted for around 50 percent of Zimbabwe’s

exports, with year-to-year variations according to weather patterns. Within agricultural

20

Critics of the fact that some companies can gain EPZ status for their ginning operations also note that

it makes little sense to grant tax and other concessions to new companies to expand ginning capacity in a

sector that already has excess capacity. However, the country is so short of foreign exchange that it

appears ready to take whatever investment it can get.

21

exports, tobacco was the dominant sector, accounting for 50 percent or more of export

value. Cotton was the second most important export crop, with lint exports accounting

for 12-17 percent of agricultural exports21

.

Since the onset of the fast-track land redistribution program in 2001, tobacco

production and exports have declined sharply. Thus, some web-based and local sources

claim that the value of Zimbabwe’s cotton exports has exceeded that of tobacco exports

over the past two seasons. By contrast, while recording a decline in the value of

tobacco exports, international sources show that these are still worth more than cotton

exports. For example, figure 6 presents the data on FAOSTAT (downloaded

19/10/2006).

Figure 6: Exports of Cotton and Tobacco Products from Zimbabwe

Exports of Cotton and Tobacco Products from Zimbabwe, 1980-

2004, US$ million p.a. (source: FAOSTAT)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

US

$m Cotton

Tobacco

Table 3 presents a range of estimates on the value of recent cotton exports. While ITC

and FAOSTAT figures are very similar, the magnitude of the jump in lint export

volume and value in 2004 is surprising, the high prices early in the year and the good

harvest that year notwithstanding. Based on ITC data, cotton lint accounted for around

9 percent of all Zimbabwe’s exports in 2000 and 2001 and 12.4 percent in 2004

(compared with 23 percent for tobacco).

ICAC data show the principal destinations for Zimbabwean lint exports between

2000/01 and 2004/05 to have been South Africa, Thailand, Italy, Portugal and Taiwan,

which between them accounted for 69 percent of lint exports (by volume) over this

period. However, Indonesia, China and India have all grown in importance as export

destinations since 2003/04. In 2004/05 these three countries accounted for 24 percent of

lint exports (by volume).

21

source: http://www.fao.org/es/ESS/compendium_2005/pdf/ESS_ZIM.pdf [accessed October 2006].

22

Table 3: Contrasting Estimates of Zimbabwe Lint Exports

Export (tons)

2000/01 2001/02 2002/03 2003/04 2004/05

ICAC 123,600 67,200 70,000 77,800 95,200

2000 2001 2002 2003 2004 2005 2006

FAOSTAT 139,650 69,427 82,550 69,771 173,408 109,486

Local sources 80,000

Export Value (US$m)

2000 2001 2002 2003 2004 2005 2006

FAOSTAT 180.7 127.2 92.4 84.0 236.8

ITC 178.0 113.2 117.1 N/a 239.3

Local sources 150 60-80 102

Notes: ICAC figures are for the international marketing season commencing August 1st; latest

FAOSTAT data sourced 9/3/2007; ITC data downloaded from http://www.intracen.org/tradstat/sitc3-

3d/er716.htm on 19/10/2006; local sources include:

http://english.people.com.cn/200609/11/eng20060911_301450.html;

http://allafrica.com/stories/200609200335.html [both accessed October 2006].

Given the share of seed cotton purchase that they account for, Cottco and Cargill also

dominate lint export. However, it is our understanding that all the firms listed in Table

2 as seed cotton buyers also export lint.

Finally, it is worth mentioning the role briefly played by Cottrade, an initiative of

CCGA that mostly served commercial cotton farmers, but also sought to assist

organized groups of smallholder farmers22

. Cottrade assisted clients to gin their seed

cotton on a contract basis and then to identify overseas buyers for the resulting lint,

along with domestic buyers for the cotton seed. Cottrade charged a 2 percent

commission on all income received from the seed cotton as a result, while the growers

were responsible for paying the toll ginning and associated transport fees. In 2001/02

producers with the necessary volumes and ability to wait for payment could obtain a

net income of around Z$200 per kg of seed cotton sold through this route, compared

with the price of Z$56 per kg paid by Cottco and Cargill. Similarly, in 2002/03

producers obtained between Z$700 and Z$1600 per kg of seed cotton sold through

Cottrade, compared with closing prices of Z$400-600 per kg offered by the buying

companies. However, with the correction in the real exchange rate in 2003/04 (see

Figure 2), this differential disappeared and Cottrade suspended its operations. In

2005/06 it commenced operations as a more conventional cotton production company,

contracting smallholder producers to grow seed cotton that it could then buy and gin.

3.6.Domestic Textile Industry

Zimbabwe developed a textile industry to supply the domestic market during the UDI

period (1965-1980), but this industry has struggled for much of the post-Independence

period. For much of the 1980s and early 1990s it was protected by a policy that forced

the CMB to supply its lint needs at subsidized prices. However, this policy was

abandoned when the cotton sector was liberalized. Several textile firms went bankrupt

at this point, including one of the biggest, Cone Textiles.

Subsequently, there has been some restructuring of the industry. Notable developments

here have included the acquisition of Cone Textiles by Iranian-Zimbabwe firm

Modzone Textiles and the 1998 acquisition of SK Textiles by Cottco to form Scottco.

22

Minimum consignment size was 25 tons of seed cotton.

23

Scottco produces knitting yarns, about 20 percent of which it sells to local end-users,

such as toweling manufacturers. The majority of the yarn is, however, exported to

South Africa and Europe (source: Cottco Company Profile). According to ITC data

(source as above), in 2004 Zimbabwe exported yarn, woven fabrics and other textiles

worth US$32.5 million and clothing items worth US$10.8 million. Over the period

2000-2004 the combined export value of yarn, woven fabrics and clothing items was 33

percent of the value of lint exports.

Textile exports notwithstanding, much of the Zimbabwe textile industry continues to

struggle for survival. To prevent the collapse of local textile firms, with the associated

and politically damaging loss of employment, cotton companies are currently required

to sell 30 percent of their lint on the domestic market. Moreover, far from selling at

import parity, the price in this artificially well-supplied market in late 2006 – early

2007 was below our estimate of the ex-ginnery cost price of lint23

. Not surprisingly,

some firms have tried to evade the 30 percent domestic sale requirement while most

send their poorest quality lint to the domestic spinners24

.

In 2005/06 official policy of the Ministries of Agriculture and of Industries and

International Trade was that cotton firms could only obtain an export licence for their

lint if they could show that they were also selling 30 percent of their output

domestically. However, as already noted, some cotton companies are registered under

EPZ regulations, which require them to export 80% of their output, and were able to

acquire export licences for their entire output. According to The Herald newspaper of

15/02/2007, five of the companies listed in Table 2 - Alliance Ginneries, Comtex, New

Cabb View, Grafax and Zesa Enterprises – have been told that they will not be given an

export licence for 2006/07 because they did not fulfil the requirement in 2005/06 of

selling 30 percent of their output on the domestic market.

3.7.Oil Sector

Until recently, the market for edible oil in Zimbabwe has been dominated by three

locally-based oil expressers: Olivine, National Foods and United Refiners. These

produce high quality, refined oil, which, prior to 2001, was composed of soya oil and

cottonseed oil in roughly equal proportions. However, even in 2000, about 20 percent

of the country’s estimated annual consumption of 90,000 tons of oil per year was

supplied by imports.

According to FAOSTAT, soya production in Zimbabwe rose rapidly in the later 1990s,

peaking at around 175,000 tons in 2001. Although smallholder production was rising

during this period, in 1999 communal farmers still only accounted for 2-3 percent of

national production, the rest coming from commercial producers (Rusike et al. 2000).

With the onset of the fast track land redistribution program, therefore, soya production

contracted rapidly. During 2002-2005 annual production averaged 90,000 tons

(FAOSTAT). With cotton production also recently lower than in 1999-2001, the

23

We have been given two price quotes: 1) Z$3000 per kg of lint, which, charged at a blend exchange

rate (higher than the one we use later in this report), was translated as US$0.33 per lb; 2) US$0.30 per lb

(using an unspecified parallel exchange rate). By contrast, our estimate of the Zimbabwe ex-ginnery lint

price is US$0.43 per lb. 24

Some of the smaller cotton firms, with poorer quality reputations, then complain that domestic textile

firms do not want to buy their lint – a reason that they give for having exported more than the 70% that

they are supposed to export.

24

established oil expressers have been short of local raw materials and unable to obtain

foreign exchange to compensate with imported materials.

The result is that cooking oil is one of the basic commodities that is currently scarce in

Zimbabwe. Imported oils (allegedly of variable quality) are available on supermarket

shelves in the main urban centers, but at prices that poorer consumers find difficult to

afford.

In response to these shortages, at least three of the newer cotton companies (Grafax,

New Cabb View and Parrogate) have invested in oil processing facilities, much as in

Tanzania in recent years. They claim that their oil is a refined product, comparable to

oil produced by the established oil expressers (a claim that the latter contest), although

they admit that it takes time to perfect the processing process to achieve high quality.

However, when oil from the established oil expressers is simply not available,

consumers have to take what is available.

The established oil expressers are clearly uneasy at the new competition, not least

because it directly reduces the local cottonseed supplies available for them. As they are

represented within the National Cotton Council, it is feasible that they could try to

restrict the growth of such competition. However, we do not see any case for

regulation. Rather, we see three possible scenarios for future competition between the

established oil expressers and new competitors:

Once the period of national scarcity is over, consumers return to their traditional

preferences for the high quality products of the established expressers;

The new companies improve their quality so as to be long-run competitors to

the established expressers, selling comparable products (their stated aim);

The new companies service a lower income market with a lower quality, but

cheaper, product, leaving the upper end of the market to the established

expressers. This final scenario has intriguing parallels with the rise of maize

hammer milling in the early 1990s (Jayne et al. 1995) and would be a good, pro-

poor outcome.

In the meantime, we assume that new entrants are making good profits from their oil

businesses, given the general shortage in the market. In early February 2007, a two litre

bottle of imported cooking oil (from South Africa) was retailing for ZW$15,000 in

Harare (US$3.20 at the parallel exchange rate), while in Muzarabani no cooking oil

was available in the main general stores, but 750ml bottles of oil produced by one of

the new cotton companies could be obtained nearby for ZW$8500 (US$1.80). We were

quoted a buying price for cottonseed of US$95 per ton, which equates to US$0.475 per

litre of oil, assuming an 18 percent extraction rate and a 0.9 conversion factor from

litres to kg.

3.8.Transport Services

Cotton companies rely heavily on private transporters of various sorts both to evacuate

seed cotton to their ginneries and to transport their lint from the ginnery to the point of

sale (if not sold f.o.t. ex-ginnery).

Until 2002, all cotton producers were required to deliver their seed cotton to a

recognized buying post where it would be graded. Following the increase in the number

25

of companies buying seed cotton, which coincided with increasing difficulties in

obtaining fuel, companies began offering to buy cotton at farmers’ homesteads and/or

reimbursing those farmers who transported their own cotton to a buying post.

Typically, local tractor owners are contracted to collect seed cotton from homesteads

and they or owners of small trucks are contracted to take it from the buying post to a

larger depot (if appropriate). Depots are normally located on major roads. From there,

larger trucks take the assembled seed cotton to the ginnery.

As already noted, owners of transport in rural areas may experience difficulties in

obtaining fuel for their vehicles. Therefore, as part of the contract, cotton companies

may supply fuel to the contractor, the value of which is subtracted from the contract

fee.

Most lint for export passes through the port of Durban, although Beira may also be

used. The most common way of transporting lint to Durban is by rail, although the lint

may have to be taken a considerable distance by truck before it arrives at the nearest

railway stop.

4 . C u r r e n t I n s t i t u t i o n a l A r r a n g e m e n t s a n d

P e r f o r m a n c e

4.1.Regulation of the Zimbabwe Cotton Sector

Since liberalization, the National Cotton Council (NCC) has provided a forum at which

major stakeholders can meet to discuss strategic issues facing the cotton sector. Major

stakeholders include cotton companies, farmers’ unions, the Ministries of Agriculture

and Industry, input suppliers, textile companies and oil processors. As has been shown

to be beneficial in multi-stakeholder fora in other contexts (Hall and Soskice 2001), the

Ministry of Agriculture has been but one player amongst many within the NCC, not a

dominant force.

When the number of cotton companies was few, it was feasible for all of them to attend

NCC meetings if they so wished. New entrants into the sector were encouraged to

participate in the NCC, which promoted practices such as the adoption by all seed

cotton buyers of four standard grades during primary marketing.

As the number of cotton companies increased, so concerns about side-selling of seed

cotton undermining the viability of credit schemes and about the impact of increased

competition on lint quality escalated. It became clear to established players within the

industry that, while fairly informal coordination had been enough to direct an industry

where the two major cotton buying firms between them controlled 90 percent or more

of the market, a different form of regulation was required where smaller companies

accounted for 20 percent or more of the market25

. In particular, a clear legal basis for

regulation was required.

25

The history of the Ghana cotton sector also demonstrates the difficulties of achieving coordination in a

sector where there are 10+ firms with a CR3 of around 80% (Poulton 1998; Poulton et al. 2004). The

Ghanaian experience suggests that, without a new regulatory framework, the Zimbabwe sector may

prove unable to sustain its support for relatively intensive seed cotton production by smallholder

producers and/or its reputation for high quality lint.

26

Therefore, in 2004, established NCC members drafted new regulations for the sector

and presented these to the Minister of Agriculture. The draft regulations proposed that

the Minister devolve much of the regulatory responsibility for the sector to the NCC26

.

According to the draft of 31/03/2004:

The NCC would draft a code of conduct for players in the sector, which would

cover aspects of quality control (e.g. standards for seed cotton grading rooms)

as well as “sanctity and fairness of contract between growers, buyers and

sellers”;

The NCC would have to recommend a buyer for licensing by the Ministry

before they could participate in the sector. All licences would have to be

renewed annually;

Seed cotton purchase would have to take place according to national standard

grades;

The NCC would appoint a “national arbitrator” to check compliance with these

national standard grades (presumably if one company brought a complaint

against another);

Requirements for packaging of both seed cotton and lint were specified, with

use of polypropylene prohibited;

The NCC would establish a Cotton Variety Committee to specify which

varieties of seed cotton could be grown in which parts of the country;

Persons or companies in breach of the regulations could be fined or imprisoned.

As of early 2007, the Minister of Agriculture has not taken the necessary action to give

these regulations the force of law. However, there have been two significant

developments in the past year.

Firstly, there has been a restructuring within the NCC. This is no longer a forum where

all players with a stake in the sector meet. Instead, major stakeholder groups (e.g.

cotton companies, farmers, oil processors) select members to represent them at NCC

meetings. There is one annual meeting, (to be) known as the National Cotton

Association meeting, at which the deliberations of the NCC are presented to all

stakeholders. Otherwise, individual stakeholders engage with NCC debates through

their representatives.

Related to this, the National Association of Cotton Ginners, Merchants and Buyers

(NACGMB) has been formed. All cotton buyers and ginners are expected to join

NACGMB, which sends two representatives to the restructured NCC. At the time of

writing, the two NACGMB representatives are the Chairman of Cottco, who has been a

prime mover behind the wider restructuring of sector governance and also of the new

regulatory framework described below, and someone from Olam, who has been

selected to represent the interests of newer companies. In our research, we have not

26

According to the 31/03/2004 draft of the regulations, National Cotton Council was defined as “a

registered body with Articles of Association, representing the cotton industry in Zimbabwe. Members

will include, but not be limited to, all registered grower organizations, ginning and marketing companies

that purchase and/or sell cotton, its products and by-products, merchants, seed companies, the Cotton

Research Institute, The Ministry of Agricultural and Rural Development and The Ministry of Industry

and International Trade. Ex-officio members will include the Zimbabwe Textile Manufacturers

Association, oil expressors, stock feed manufacturers and agricultural inputs and chemical suppliers.”

27

gathered views of cotton companies on the functioning, effectiveness or

representativeness of NACGMB, which is still a relatively new organization.

The second significant development is the introduction of new conditions that cotton

companies must fulfil if they are to obtain an export licence. In the absence of a clear

legal basis for regulation, the granting or withholding of an export licence is the main

point at which leverage can be exerted over the conduct of cotton companies.

NACGMB – and, as noted above, particularly Cottco – have, therefore, convinced the

Ministries of Agriculture and of Industry and International Trade that export permits

should only be given to cotton companies that fulfil certain criteria. In 2006 the sole

criterion stipulated was that a company should sell 30 percent of its lint to the domestic

textile industry. In 2007 a second criterion has been added: that the company pre-

finance cotton producers. As will be discussed in section 6, the practical

implementation of this second criterion in 2006/07 will have profound implications for

the competition-coordination balance within the sector.

As an extension of this approach, NACGMB has also drawn up a code of conduct for

cotton companies that incorporates much of what was in the 2004 draft regulations. In

the future, it is envisaged that NACGMB will recommend to the two ministries whether

or not a company should receive an export licence and that this recommendation will

be based on whether or not they have adhered to this code of conduct in their past

operations.

Finally, we note the particular role played by farmers’ organizations in the governance

of the Zimbabwe cotton sector. As noted earlier, in the pre-Independence period, the

National Farmers’ Union (NFU) had considerable influence over policy decisions

affecting the cotton sector. To some extent, this continued through the 1980s, when the

NFU had become the Commercial Farmers’ Union (CFU). Naturally, however, the

influence of the CFU declined as commercial farmers exited the sector.

After 1980, other farmers’ unions developed alongside the CFU, including the

Zimbabwe Farmers’ Union (ZFU) and the Indigenous Commercial Farmers’ Union

(ICFU). For a number of reasons, these newer organizations exert less power within the

sector than NFU once did. They are fragmented, rather than united. They do not have

the financial or other resources that NFU had27

; and they face much more daunting

challenges in terms of reaching out to, and communicating with, a poorer, more

numerous, more dispersed and in some cases semi-literate membership base.

Nevertheless, in a concentrated sector, they have a potentially vital role to play in

sector governance and perhaps, in particular, in seed cotton pricing. The seed cotton

pricing story is told in more detail below. However, here we note that in 2004 many

farmers were unhappy with the seed cotton prices that they were being offered by the

cotton companies and for a time withheld their seed cotton waiting for prices to rise.

Eventually, this prompted the Ministry of Agriculture to convene a meeting of all the

main sector stakeholders to discuss a reasonable price.

27

ZFU has received capacity building support from a number of donor organizations since 1980.

However, in recent years, perhaps due to the deteriorating political climate in Zimbabwe, this assistance

has been scaled back. We have also been told that, in the difficult current funding climate, ZFU receives

some operational funds from Cottco (mainly to enable its officials to attend NCC meetings). This,

however, would tend to reduce its ability to challenge Cottco or allied cotton companies if ZFU felt that

farmers were being given a raw deal.

28

Since that time, in a bid to prevent a repeat of the 2004 stand-off, an NCC pricing

committee has met to discuss seed cotton prices in advance of the buying season. This

committee is said to consider a number of factors in advising what a reasonable price

might be. These include the world lint price, ginners’ costs (and desired margins) and

farmers’ costs of production, on top of which there is an aspiration that farmers achieve

a 25 percent margin. In neither 2005 nor 2006 have farmers been particularly impressed

with the price that company representatives within the committee proposed to pay.

However, in 2006 price competition between companies took off and rendered the

unresolved price negotiations between companies and farmers’ unions redundant. As a

result of this competition, our calculations (presented below) suggest that most farmers

did receive a 25 percent margin on their costs. As discussed in more detail in section 6,

however, price competition between companies could be greatly reduced in 2007,

which makes the role of farmers’ unions in negotiating fair prices for producers far

more important. For the reasons already set out, there are grounds for fearing that, in

their current state, the unions are not strong enough to strike a hard, but well-judged,

bargain with the companies.

4.2.Public Investment in the Cotton Sector

In the past, public investment in the cotton sector has taken two main forms: subsidies

to the CMB to cover operating losses and support for the work of the Cotton Research

Institute. However, the main function of the former was to compensate for the

subsidized prices at which the CMB was forced to sell lint to domestic textile

companies, so arguably this was more of an investment in the textile sector than in the

cotton sector.

Since liberalization, cotton companies have basically operated without public support

(although see footnote 16 for an exception). Meanwhile, as reported by Hanyani-

Mlambo and Poulton 2004 and Hanyani-Mlambo et al. 2005, since the onset of

economic crisis in 2001, central government funding for the Cotton Research Institute

has run at very low levels. Public investment in the cotton sector is thus currently close

to zero.

At the local level, cotton companies complain that they pay site and buying post licence

fees to local authorities, which are supposed to contribute towards the cost of road

maintenance in their districts (cotton companies being some of the major users of rural

roads in cotton producing zones). However, they do not see as much investment in road

maintenance and construction as they would expect.

4.3.Research and Extension

Mariga 1994 attributed a large share of Zimbabwe’s cotton success to extensive crop

research supported by effective extension. The Cotton Research Institute (CRI), based

in Kadoma and established in 1925, remains the key player in cotton research. CRI is a

research establishment under the Department of Agricultural Research and Extension

(Arex) in the Ministry of Lands, Agriculture and Rural Resettlement. Over the decades,

it has been responsible for breeding a succession of improved varieties as well as

testing agro-chemicals and developing techniques for their use.

29

Table 4 shows that CRI has continued to develop new varieties of seed every four-six

years, despite ever more pressing funding constraints – a level of performance not

matched in any other southern or eastern African country.

According to Hanyani-Mlambo et al. 2002, the main varieties grown by farmers in

2001/02 were SZ9314, FQ902 and LS9219, specific varieties developed for the

different cotton growing regions. Due to better access to irrigation facilities and

resource endowments, large-scale commercial farmers were free to grow any variety of

their choice, but smallholder farmers are advised to observe specific recommendations

ideal for their particular environments, resource endowments and management

capabilities.

Table 4: Release Dates and Key Characteristics of Recommended Cotton Varieties.

Cotton

Variety

Year of

Release

Key Attributes

Medium Staple

Albar BC

853

1989/90 Storm proof and can be grown under both irrigated and

dryland low-input conditions. Has better tolerance to

verticillium wilt than all other varieties.

Albar FQ

902

1993/94 Drought tolerant but performs well under irrigated, high-input

conditions. Susceptible to red spider mite attack.

Albar AG

4869

1993/94 Under good management conditions, forms bolls right to the top

of the plant. Very susceptible to verticillium wilt.

Albar SZ

9314

1999/00 Storm proof, good recovery potential from stress conditions

and can produce a top crop if managed well.

CRI-MS1 2006 15% higher yield than SZ 9314; modest improvements in fibre

length and strength

CRI-MS2 2006 Early maturing; high resistance to verticillium wilt and jassids

Long Staple

CY 889 1993/94 Has some tolerance to verticillium wilt when produced under

high management conditions.

LS 9219 2000/01 Performs well under both low- and high-input conditions.

Does not defoliate under medium to low wilt infection.

Source: Quton Seed Company’s Variety Guide (2001/2002); discussion with Dr.L.Gono 7/02/2007

Unfortunately, in recent seasons the activities of CRI have been seriously impeded by

lack of funds and understaffing challenges. In 2003/04 the research institute had six

researchers out of a staff establishment of eight full-time researchers. Moreover, high

staff turnover due to low remuneration and poor working conditions had resulted in

reliance on young, inexperienced researchers (Hanyani-Mlambo et al. 2002). As of

February 2007, seven of the research posts were filled and the young researchers were

gaining in experience, but the staffing situation could not be described as assured.

Government funding allocation to CRI has been declining in real terms over the years

and this has been compounded by recent economic crisis and hyperinflation. However,

CRI also receives some funds through the EU’s STABEX program (earmarked for

particular projects) and has a contract with Quton Seed Company in which Quton pays

a royalty of 5 percent for CRI cotton varieties that it multiplies and markets (see

below). In addition, CRI does contract research for chemical and fertilizer companies28

.

In 2004, of the ZW$ 2,093 billion core CRI research budget allocation, ZW$ 2,0 billion

28

For example, in 2006/07 CRI is testing a foliar spray for one of the main agro-chemical companies in

the country.

30

came from Quton royalties and only ZW$ 93 million was contributed directly from

government funding (Hanyani-Mlambo et al. 2005).

While the contract with Quton has undoubtedly sustained CRI’s research activities in

recent years, it has also created a dependence on Quton. This is coming into sharp focus

now, as Quton has been developing its own research/varietal development program

since 2001 (perhaps in turn reflecting Quton’s uncertainties about the future of its

relationship with CRI). Quton’s research team comprises two experienced breeders,

two agronomists, plus a research technician and field support staff. They have imported

germplasm from a number of countries for breeding purposes, but report increasing

difficulties in accessing germplasm, as use rights are increasingly controlled by a small

number of multinational seed companies. Quton has submitted their first three varieties

to Seed Services (the government body responsible for varietal approval) and these

could be released by the end of 2007. As its own varieties approach release, Quton’s

incentive to multiply and market new varieties emanating from CRI (for example, the

two varieties released in October 2006) falls. It is presumably only a matter of time

before the stream of royalties received by CRI begins to dwindle.

Discussions about a possible merger between Quton and CRI are, therefore, at a very

preliminary stage (the relevant parties are Quton, CRI and Ministry of Agriculture and

they have not all met together).

Reflecting the demands of international spinners, the main current emphasis in the

breeding programs of both CRI and Quton relates to fibre quality. In interviews with

Dr. Gono of CRI and Mr. Mtetwa of Quton in early 2007, increased fibre length and

strength were listed as the two main breeding priorities, with other fibre characteristics

such as elongation and micronaire also mentioned.

On the extension side, since liberalization, government extension staff (now part of

Arex) have collaborated with “loans and extension officers” employed by Cottco and

other companies to promote cotton production. However, companies complain that

Arex staff have diminishing budgets, so their participation at meetings has to be

resourced by the companies. In addition, where competition is fierce, some company

staff are reluctant to invite Arex staff to meetings in case they pass on “commercially

sensitive” information to competitors.

Figures collected by Hanyani-Mlambo and Poulton 2004 for four major production

districts showed that the ratio of company extension officers to farmers serviced by the

companies in question29

ranged from 1:100 (Cargill in Gokwe South / Binga) to

1:1000+ (FSI Agricom and IDAI Modzone in the same area). However, the figures

showed considerable variation across areas even within a given company. The ratio

depends on a number of factors, including whether a company is targeting expansion in

a particular area and how many active village Chairmen or group leaders the extension

agent can collaborate with in the area. Indicative figures collected during February

2007 fell within the wide range given above. However, we anticipate that much of the

effort of front line staff this season will be devoted to input distribution and to

monitoring production activity for credit recovery purposes, rather than to extension

per se.

29

“Serviced” here may mean only that the company bought seed cotton from this number of producers; it

does not imply any particular level of pre-harvest service.

31

4.4.Seed Production and Supply

The Quton Seed Company, a wholly owned subsidiary of Cottco, is the sole producer

and supplier of cotton seed in Zimbabwe. While in theory other companies could set

themselves up in competition, none have attempted to do so30

. Under its contract with

CRI, running from 2006 till 201031

, Quton is accorded exclusive rights to multiply and

market cotton varieties developed by CRI, in return for which Quton pays CRI a

royalty of 5 percent of the value of CRI varieties that it markets. As part of the working

agreement, the breeding section of CRI develops, evaluates and maintains several

cotton varieties, while Quton multiplies the seeds for sale to farmers and also to all the

other cotton buying companies in the sector.

This arrangement has worked well so far, although the emerging tensions created by

the maturing of Quton’s own research efforts have already been noted. Quton is a

dynamic company and has no incentive to abuse its monopoly position by charging

excessive prices for its seed. If it did so, its owner, Cottco, would be the biggest loser,

given that Cottco retains the biggest share of the cotton market.

Although Quton is well funded and managed, its seed multiplication program also faces

its own challenges. Prior to the onset of the accelerated land reform program,

multiplication of certified seed was undertaken almost exclusively by the remaining

commercial cotton producers (the higher prices paid for certified seed making the

activity still worthwhile for them). As these experienced commercial farmers have now

disappeared from the sector, Quton has been forced to contract smallholder and newly

resettled farmers to multiply seed. While the company works with high quality

producers in selected (relatively remote) areas32

, in a smallholder environment it is

difficult to enforce “buffer” zones. (Ideally, no other cotton should be planted within

100m of cotton being produced for seed multiplication so as to prevent cross-

pollination). It is also more difficult to ensure that the large number of contracted

smallholders perform all the desired crop management practices. Quton testing

procedures suggest that there has so far been minimal impact on cotton seed quality

from the shift to small-scale producers for cotton seed multiplication. However,

maintaining the quality of the country’s certified seed has become more difficult

(Hanyani-Mlambo and Poulton 2004).

Many of the stakeholders within the Zimbabwe cotton sector are keen to introduce GM

seed technology. The requisite national biosafety framework is in place and the

Biotechnology Authority within the Office of the President is supportive. However, so

far no partner has been found that is willing to licence Quton to incorporate a Bt gene

within existing local seed varieties. In 2004, Quton trialled a Syngenta “VIP” (Bt)

variety in Zimbabwe. Initial findings were that the seed was very effective in

controlling bollworm, but rights to the relevant Syngenta gene then passed to Delta and

Pineland (D&PL) and the trial stopped. More recently, Quton has signed an agreement

with D&PL that allows D&PL to incorporate their Bt gene into Quton varieties and

30

Given Quton’s exclusive right to multiply and market seed produced by CRI, any competitor would

have to use imported seed. This would have first to be approved for local use, which involves a rigorous

three-year trial process. Given the years of high quality research effort embodied in CRI seed, it is highly

unlikely that any imported variety would outperform CRI-developed seed under Zimbabwean conditions. 31

This is an extension of a contract that initially ran from 2000 to 2005. 32

Remote areas are also selected as a way of reducing the side-selling of Quton seed to other companies.

However, as Quton “only” pays a 20% premium over the prevailing Cottco price, while newer

companies at times pay up to 50% more, side-selling can still be a problem.

32

market these within the region. Quton will receive royalty payments on any resulting

sales, but the agreement apparently does not provide for any gene or germplasm flow in

the other direction. Zimbabwean cotton stakeholders are, therefore, hoping that an

Indian or Chinese partner can be persuaded to work with Quton to develop a local GM

cotton variety.

4.5.Access to Fertilizers and Chemicals

Prior to the current economic crisis, Zimbabwe had a well-developed input supply

industry33

that originally developed to service the commercial farm sector, but which

also extended to networks of local input stockists in communal areas. Since much land

in the communal areas of Zimbabwe is poor (sandy), both state and cotton company

extension activities have actively promoted the use of fertilizer for cotton production,

as well as chemical use for crop protection. This has been backed up by the provision

of credit for cotton production, first through AFC during the 1980s, then by Cottco -

and more recently by other companies - in the liberalization era. Thus, smallholder

cotton producers have been able to access seed, fertilizers and chemicals either through

company credit schemes or (until recently) through cash sales by companies or

purchases from local input stockists.

As a result of this, unusually amongst cotton producers in southern and eastern Africa,

many smallholder producers in Zimbabwe regularly apply chemical fertilizer to their

cotton. In two household surveys conducted by the DFID-funded “Competition and

Coordination” project in Gokwe South and Muzarabani Districts in 2002 and 2004, 43

percent and 45 percent respectively of the cotton farmers applied inorganic fertilizer on

their cotton plots. In the latter survey, average use by cotton farmers who did apply

inorganic fertilizer was 110 kg/ha.

The 2004 survey found significant differences in fertilizer use between farmers who

received input credit from a cotton company and those who didn’t (Table 5). Farmers

who received input credit from a cotton company also reported higher yields than those

who didn’t.

33

According to Hanyani-Mlambo et al. 2002, compound fertilizers are manufactured locally, but some of

the raw materials are imported. For example, basic nutrients for basal fertilizers such as nitrogen and

phosphorus are sourced locally, while potassium and urea are imported. The major manufacturers of

fertilizers in Zimbabwe in 2002 were the Zimbabwe Fertilizer Company (ZFC) and Windmill. Omnia

and Farmers World were smaller companies that purchased ingredients from the bigger companies for

blending. Hanyani-Mlambo et al. 2002 reported estimated market shares for chemical fertilizers as ZFC

(40%) and Windmill (40%), with the remaining 20% shared amongst the smaller companies. Meanwhile,

the majority of crop chemicals are imported. Again according to Hanyani-Mlambo et al. 2002, the key

players in this field in 2002 included Syngenta, Windmill, Agricura, ZFC, Technical Services Africa,

Crop Serve and Rarefield. Companies such as Windmill, Agricura and ZFC acted as distribution agents

for Syngenta and other international chemical manufacturers. As well as importing products directly,

some Zimbabwean agro-chemical companies were also involved in chemical mixing, repackaging and

developing formulations that were more suitable for the local environment. With regard to crop

chemicals, the estimated market shares were Agricura (40%), ZFC (30%) and Windmill (25%).

33

Table 5: Fertiliser Application by Cotton Farmers with/without Credit

Received

Seasonal

Credit?

Number Number

Using

Fertiliser

(%)

Mean

Fertiliser

Application

(kg/ha)+

Median

Fertiliser

Application

(kg/ha)

Maximum

Fertiliser

Application

(kg/ha)

Mean Seed

Cotton

Yield

(kg/ha)

Yes 112 65 (58%) 67.7* 41.7 500 1087.7*

No 163 58 (36%) 36.7* 0 400 869.9*

* Means are significantly different (5% significance level)

+ Includes those not applying any

Source: 2004 household survey

The 2004 household survey also found that over 95 percent of cotton producers applied

some crop protection chemicals. Considerable effort was made to ensure that reliable

data on chemical application were obtained and a surprising finding of the survey was

that on average, farmers sprayed their cotton crop ten times during the 2003/04

season34

. This figure was consistent with findings from earlier informal discussions

with farmers in which they claimed that many farmers sprayed their crop with synthetic

pyrethroids up to once per week for the first three months (November/December –

January/February), then either once a week or twice a month with other chemicals for

the next four months (February – April/May). Unlike, say, in Tanzania, it is common

for a single smallholder cotton producer to use three or four different types of chemical

on their cotton in the course of a season – an indication of the degree of development of

the input supply system.

At liberalization, Cottco inherited the CMB’s input credit scheme, which by 1993-94

already served over 40,000 producers (Woodend 1995). Credit repayment rates

suffered in the years immediately following liberalization and the company had to

tighten up its operations in 1997. As a result, Gordon and Goodland 2000 reported

repayment rates of 98 percent - almost unique amongst seasonal lending schemes

within Africa. Producers who received credit from Cottco had to be organized into

groups, so that peer pressure could be brought to bear on those who were slow to pay.

If someone refused to repay, the cotton company could decide to seize household

assets.

Hanyani-Mlambo et al. 2002 and Larsen 2002 both suggest that about 70,000 producers

were served by Cottco’s input credit scheme at the end of the 1990s (in the latter case,

this includes producers on the Cotpro scheme as well). However, The Cotton Company

of Zimbabwe Ltd 2001 reported 44,593 participants in the scheme during 1999/2000,

falling to 33,821 in 2000/01. (According to this report, repayment in 2000 was hit by

Cyclone Eline, so fell to 93 percent). However, even with 70,000 producers receiving

credit, this would only amount to around 25 percent of producers in the sector.

Over time Cottco has increasingly lent to producers who have established a track record

of loan repayment, plus new producers who have clear capability to repay loans. Credit

recipients have, therefore, generally been better resourced than those who did not

qualify for credit. According to the 2004 household survey data, producers who

received input credit from a cotton company on average cultivated 2.57 ha of cotton,

compared with 1.62 ha amongst those not receiving credit. (This difference was

statistically significant with 5 percent confidence interval). While there has, at least

34

In the case of chemicals, no difference in application rates was observed between farmers receiving

credit from cotton companies and those not doing so.

34

until recently, been a small minority of better-off smallholder households who

preferred the independence that came with self-financing production, the majority of

cotton producing households that had to buy their inputs on cash were poorer

households.

When new companies began to enter the sector, many (including Farmers’ World and

FSI Agricom) initiated their own credit schemes as a way of competing with Cottco for

farmer loyalty. Even Cargill, which entered the market straight after liberalization but

chose not to operate an input credit scheme35

, began offering credit to known and

trusted growers in 2002/03, recognising that it would lose some otherwise loyal

growers if it did not provide a credit option when all competitors were doing this

(Hanyani-Mlambo and Poulton 2004). Thus, the 2004 farmer survey found that 41

percent of cotton producers received credit from a cotton company for the purchase of

one or more inputs (seed, fertilizer, chemicals) and, in a small minority of cases, also

for the purchase of hired labour for weeding or harvesting. However, the same research

found that new schemes often struggled to emulate the repayment rates achieved by

Cottco (Hanyani-Mlambo et al. 2003; Hanyani-Mlambo and Poulton 2004).

At the same time, Cottco began to feel the effects of increased side-marketing of seed

cotton by farmers whom it was supporting with credit. In 2002/03 real interest rates

within company credit schemes were strongly negative in Zimbabwe’s hyper-

inflationary environment. Thus, many farmers apparently chose to sell enough seed

cotton to the company that had provided them with credit to pay off their cash debt, but

then to sell the remainder of their seed cotton to the firm that was offering the highest

price for seed cotton. Cottco, with the largest credit scheme and the lowest seed cotton

prices in 2003, was worst hit. After further problems with side-marketing in 2004, the

company dramatically cut back its number of credit recipients for 2004/05 – to numbers

well below those it inherited in 1994. However, the low harvest in this season,

combined with the increasing difficulty that farmers were encountering in paying for

inputs on cash (due to the very difficult economic circumstances), persuaded them to

reverse the trend in 2005/06 and 2006/07. In the current season, the numbers of farmers

that the company is supporting is back up close to its historic highs.

Nevertheless, the fact that some companies see the importance of extending seasonal

credit, but others don’t, remains a major source of tension within the Zimbabwean

cotton sector. Cottco, in particular, resents the fact that other companies have been free-

riding on its efforts to promote crop production. Cottco’s decision to increase its

seasonal lending for 2006/07 was thus linked to the agreement reached between the

National Cotton Council and the Ministries of Agriculture and of Industry and

International Trade that participation in input supply should be used as a criterion for

being granted an export permit, i.e. all companies would have to provide input credit in

2006/07.

In theory, all companies are providing a broadly comparable package of seeds, fertilizer

and crop protection chemicals to producers in 2006/07. Companies have been asked to

provide evidence to NACGMB of the number of producers, the hectares of cotton

production that they have supported and the value of inputs provided. (At the time of

writing, this information is not public knowledge). A national register of all farmers

who have received credit is being compiled, which may enable companies in the future

35

Instead, Cargill sold inputs to producers at harvest time, ready for the next season.

35

to blacklist producers who default on their loans and perhaps also who deliver

adulterated seed cotton (see below).

In 2006/07, therefore, we have a situation in which farmers’ ability to buy inputs on

cash has decreased with economic hardship and many input stockists have closed36

, but

cotton companies are providing more support to producers than ever before. While as

recently as 2004 we estimated that only 41 percent of cotton producers received any

credit from a cotton company, the main companies estimate that only 5-10 percent of

cotton producers will have self-financed their cotton production in 2006/07.

Our focus group discussions provide an interesting snapshot of the input supply and

access situation in 2006/07 (Table 6). Questions about which companies serviced

which farmer types were only asked in general terms in Muzarabani. When it became

clear that established and new companies are servicing quite different farmers and to

very different levels, more detailed questions were asked in Gokwe South to

substantiate this.

Table 6: Inputs Supplied 2006/07, by Company and Farmer Type

Farmer Group

Village Group 1 Group 2 Group 3/4

Chizeya

(Muzarabani)

All companies

will service

Cottco provides full

input package; others do

not give fertiliser

Cottco does not service; registered with

Olam and others

Butau

(Muzarabani)

All companies

will service

All companies will

service; 1/3-1/2 get

fertiliser

Only served by newest

companies; given seeds,

no fertilizer, maybe

some chemicals

As group 3

Zharare

(Gokwe South)

Cottco (5);

full package

of fertilizer

and chemicals

Cottco (3), Insing (3),

Grafax (1); Cottco

farmers received 2 bags

of fertilizer each and full

chemicals; others no

fertilizer and limited

chemicals

Insing (3); Olam (1), “free” (3);

registered farmers have received seed

and one bottle of chemicals only

Mutamburigwa

(Gokwe South)

Olam (5),

Cottco (3),

Cargill (1);

full package

for part of

planted area

Olam (13), Cottco (4),

Cargill (4), FSI (1),

Insing (1); first four

companies have tried to

offer full package, but

supply difficulties for all

but Cottco

Olam (5), Insing (3),

Cottco (2), Cargill (2),

“free” (4)

Olam (2),

FSI (1),

“free” (3)

Few have been given any inputs other

than seeds

Source: focus group discussions

Note: group 1 contains the largest producers

The Gokwe South focus groups, while at best only indicative of possible wider trends,

suggest that the claim made by established companies that only 5-10 percent of

producers have received no inputs on credit in 2006/07 is not far out. (This claim is

disputed by some of the smaller companies). In Zharare village, 16 percent (3/19) of

producers had not registered with, nor received any inputs from a cotton company in

36

This would appear to be the result of both demand and supply side factors. In the maize sector, the

government has distributed some fertilizer at subsidized prices, which would tend to reduce business for

stockists. On the supply side, the fertilizer and chemicals industry has experienced escalating difficulties

in obtaining foreign exchange. Cotton companies have thus had to assist fertilizer companies to enable

these companies to provide them with fertilizer.

36

2006/07. In Mutamburigwa village, the figure was 13 percent (7/54). Given that these

“free” farmers were all in groups 3 or 4 and were unsupported because they were too

poor to be considered creditworthy by any of the companies, they would certainly

account for less than 5 percent of the cotton produced in these villages.

The next point to note from Table 6 is the huge difference in the level of pre-harvest

support received across farmer types. Contrary to expectations, it is certainly not the

case that a broadly comparable input package has been supplied to all producers.

Indeed, some of the producers in groups 3 and 4 who are registered with a particular

company had, at the time of the focus groups (1-6/02/2007), received no input support

beyond an initial distribution of seed for planting. There is thus some latitude for

dispute at harvest time as to whether these farmers have really been “supported” by a

particular company or are free to sell their seed cotton to whichever buyer they like.

However, we note that no Cottco-supported farmer can claim lack of pre-harvest

support as a reason for selling to another company.

The final point to note from Table 6 is the differences across companies in the types of

farmers supported, as well as in the level of pre-harvest support given to these farmers.

Thus Cottco and Cargill have high quality records, derived from years of experience in

the Zimbabwe cotton sector, that permit them to select and work with the highest

potential farmers. When signing up with Cottco or Cargill, these farmers know that

they will receive the best pre-harvest support, but that they may also be forced to accept

a lower seed cotton price at harvest time than may be offered by newer entrants to the

sector. They, therefore, undoubtedly assess their chances of being able to side-sell some

of the cotton that they produce and, if they conclude that this will be difficult, they then

have to assess the trade-off between better yields arising from better access to inputs on

the one hand and higher seed cotton price on the other. Using farm household models,

Poulton 2005 found that households that could access a full input package on credit (as

opposed to receiving no credit) were better off doing this even if they had to accept 40

percent lower seed cotton prices as a consequence.

By contrast, newer companies, with no internal database on the performance of

different producers, find themselves working disproportionately with the poorer

producers and/or producers who have been blacklisted by the established companies.

This adverse selection problem facing newer companies was also noted by Poulton

1998 in the case of Ghana and can contribute to the perpetuation of side-selling

practices by opportunistic farmers if the rate of entry by new companies is high enough.

Three reasons can be advanced as to why newer companies offer a much more

restricted package of inputs to the farmers whom they serve than the established

companies do. Firstly, in 2006/07 newer companies have undoubtedly experienced

more difficulty in sourcing inputs than the established companies, which, over the

years, have developed close links with the main input suppliers. For some of the newer

companies, 2006/07 is the first season in which they have been involved in input

supply. Fertilizer has been particularly scarce in 2006/07, due to the foreign exchange

constraints experienced by local fertilizer companies; and Cottco gained competitive

advantage by striking an early deal to ease that constraint for its own benefit. Secondly,

newer companies have ended up dealing with producers whose ability to use and repay

credit is, on average, much more limited than that of the top producers supported by the

established companies. Offering a more restricted input package to such producers may

well be a rational, risk-reducing strategy. Many of the group 3 and 4 producers have not

37

been credit beneficiaries in the past and, as a result, few will have made intensive use

of inputs, either. Thirdly, some commentators question the commitment of some of the

newer companies to the new rules of the game that have come into effect in 2006/07.

They have only reluctantly been persuaded to get involved in input supply and are

waiting to see how rigorously enforced the new rules are before they decide to invest

wholeheartedly in the capacity to provide high quality pre-harvest services to

producers.

Pricing of seed, chemicals and fertilizers has become a very tricky issue under

Zimbabwe’s hyper-inflationary conditions. In 2002/03 real interest rates within

company credit schemes were strongly negative, which affected the quantity of seed

cotton that companies received from borrowers. As companies made a loss on the

credit transaction per se and were really interested in the resulting seed cotton supplies,

in subsequent years they began charging more “realistic” interest rates. However, under

1000 percent+ (and highly unpredictable) inflation, companies could set input prices at

planting time that sound extortionate to farmers, but still end up representing negative

real interest rates. In 2006/07 the majority of companies have elected not to announce

input prices when inputs are distributed37

. However, in focus groups farmers recorded

their dissatisfaction with this arrangement, too, as they fear being “stung” by

companies at harvest time, losing much of their revenue through unexpectedly high

input costs.

4.6. Quality Control38

One of the greatest concerns with increased competition in the Zimbabwe cotton sector

is the negative impact that it is having on the quality of exported lint, making

Zimbabwean lint less competitive on the international market. The Zimbabwean cotton

sector was long admired for its effective quality control procedures, which started with

the strict implementation of a four-class grading system at primary marketing. At the

ginnery, Cottco undertook further sorting, such that it was able to grade the resulting

lint into one of 40 categories that customers could specify when purchasing.

However, starting in 2001/02 the sector’s quality control procedures came under strain

as a result of the increased number of players in the system. In 2001/02, and to a lesser

extent 2002/03, this was exacerbated by reduced cotton output as a result of drought,

leading to a “rush” for cotton.

New entry and increased competition in the cotton sector can potentially exert a

negative influence on the quality of exported lint through at least two channels:

New entrants may have less experience in cotton quality management than

established firms, leading to less uniform and lower quality lint, even if seed

cotton quality remained unchanged. We have not investigated this issue, but

note that new entrants, including those that operate their own ginneries, have

varying experience in the international cotton business. While Tarafern /

Romsdale is part owned by Plexus, an international lint trading company, none

37

Olam may be an exception to this, but we have not obtained details of their prices, if indeed they have

been announced in advance. 38

Much of this section draws directly from Hanyani-Mlambo and Poulton 2004 and Hanyani-Mlambo et

al. 2005.

38

of the more recent entrants can draw on comparable experience to either Cottco

or Cargill.

By undermining grading procedures at the point of seed cotton purchase,

competition can undermine the incentives for producers to aim for high quality

seed cotton. Thus, where producers know they will be paid a similar price

irrespective of grade / quality, they have little incentive to be careful only to

pick fully mature bolls when harvesting39

or to pick quickly so as to avoid

damage to open bolls from insects or dirt/dust while still on the plant.

Moreover, if they believe that they will be paid in the same way in future, they

have less incentive to exercise discipline and care at all stages of the production

process (e.g. pest control), although many of the cultural practices conducive to

achieving high quality are also necessary to achieve high yields. Inevitably,

lower average quality seed cotton feeds through into lower quality lint.

In 2001/02, allegations of lax or no grading at primary marketing were levelled at new

entrants into the sector and also at so-called fly-by-night buyers, who buy seed cotton

to sell onto registered companies. Such players got bolder in 2002/03, with Dynamic

Cotton being the first to offer flat rate prices for all its seed cotton purchases

(irrespective of grade).

Perhaps surprisingly, even the larger companies felt compelled to follow suit to a

greater or lesser degree, despite their claimed concern about the future impact on the

cotton sector as a whole. Their retreat from grading standards could be observed in one

of two ways. Firstly, they allowed (or even instructed) their graders to relax normal

grading standards, so as to accommodate farmers’ expectations on the grades of

delivered seed cotton. In all major cotton growing regions, some farmers demanded

better grades for their seed cotton in a context where, due to heightened competition,

companies had little choice but to comply if they were not to lose the seed cotton to a

competitor. In some cases, established companies also upgraded a proportion of

delivered cotton bales as a way of encouraging second and third deliveries from a given

farmer - a way of discouraging the side-marketing that was discussed earlier. Secondly,

some depots and buying points followed their newer rivals and fly-by-night buyers in

abandoning grading altogether, particularly as the competition for supplies reached its

peak towards the end of the buying season.

During the 2003/04 season, the majority of primary marketing transactions were

completed either without grading taking place or with grading being merely a formality

from the farmer’s perspective because a flat-rate price was given irrespective of grade.

Some companies bought seed cotton from farmers without adhering to any grading

system and instead opted to grade afterwards. Proper grading procedures were only

followed (if at all) at the ginneries before ginning.

Recent surveys of international buyers have produced mixed findings on the impact of

increased competition on the quality of Zimbabwean lint. The buyers’ survey

conducted by the “Competition and Coordination” project in late 2004 - early 2005,

which asked about the average premium or discount given to different African lints

over time, found that there was little difference in the average premium over the A

index paid for Zimbabwean lint in 1995-99 and 2000-04 (Figure 7). However, one

respondent who indicated that the premium received by Zimbabwean lint had fallen by

39

Traditionally in Zimbabwe immature bolls would be classed as grade C.

39

1c/lb between 1995/99 and 2000/04 commented that the premium in 1995/99 was

attributable to “good classing (only three players)”, whereas the lower premium in

2000/04 was attributable to “new players (exporters/ginners)”.

Similarly, Estur 2007 found that the premium paid for the top lint grades from

Zimbabwe had only fallen by USc1/lb between the mid-1990s and 2006/07. On the

other hand, Estur 2007 also reports that, “PT Apac Inti Corpora classed Zimbabwe

cotton in the group of seriously contaminated origins. Based on 2,900 tons inspected in

2004 and 2005, 93 percent of the bales were found to be contaminated, on average 28

grams per ton, including 82 percent of fibrous contaminants. This cotton was likely

supplied by newly established ginners.” (p39).40

Figure 7: Average premium/discount over the A Index

Source: Larsen and Poulton 2005

Field work conducted in early 2007 provided insights into the extent of the quality

control problem currently experienced by the Zimbabwe sector and revealed that, while

the premium received by the top lint grades has not fallen much (i.e. classing standards

have been maintained), the proportion of lint achieving those top grades has

plummeted.

At the Cottco ginnery in Muzarabani, we were told that in 2006 an additional seven

people (making 15 in total) had to be employed to sort all seed cotton consignments

before they could be sent into the ginnery. These people rejected a total of 12.5 tons of

seed cotton that had been contaminated by water, sand or fuel, and sorted out a

staggering total of 430kg of polypropylene fibres and 470kg of other foreign matter. In

the early 2000s, comparable figures would have been less than one ton of seed cotton

rejected (mainly for spoilage during transportation – not adulteration by farmers41

) and

negligible polypropylene fibres and other foreign matter.

40

A large Indonesian spinning mill, PT Apac Inti Corpora, collected comprehensive data on the nature

and the extent of contamination in different origins of cotton, based on the systematic contamination

removal from over 200,000 tons of cottons in the last 7 years. The results of the study were presented at

the 2006 Bremen Cotton Conference. 41

Cottco are believed to be less prone to adulteration problems (water, sand and rocks) than newer

companies, because they have a farmer tracing system based on bale numbers and will take the police to

any farmer whose bales are found to have been adulterated when they are opened at the ginnery.

Average premium / discount over the A

Index, 1995-99 and 2000-04

-6

-4

-2

0

2

4

6

Zimba

bwe

Zambi

a

Ugan

da

Tanza

nia

Moz

ambi

que

Ghan

a

Country

Pre

miu

m /

Dis

co

un

t

(Us

c/lb

)

1995-99

2000-04

40

The polypropylene problem comes from inadequate distribution of picking bags for

producers to collect cotton and of woolpacks for them to transport seed cotton to

buying posts. These problems are blamed on newer companies, but Cottco is obviously

also buying seed cotton that has been packaged in this way. Signs prohibiting

polypropylene are now clearly displayed at the gates and around the compounds of all

Cottco ginneries.

Cargill report that, in the mid-1990s, around two thirds of all seed cotton would have

received an A or B grade. In turn, all of this would have fed through to lint of the top

three grades. In 2006, according to buying slips, 35 percent of Cargill’s seed cotton

received an A or B grade, but more rigorous re-grading at the company’s ginneries

reduced this figure to less than 1 percent! As a result, even with the use of lint cleaners,

only 3 percent of lint achieved the top grade (compared to 20-25 percent in the late

1990s) and less than 50 percent could be sold as one of the top three grades. This figure

fell to less than 10 percent for their oldest ginnery, which does not have lint cleaners

fitted.

These figures were corroborated at Cottco’s Gokwe ginnery42

. Figure 8 shows how the

seed cotton purchased in recent years was graded at the ginnery. There is a striking

one-off fall in the proportion achieving grade A between 2003 (when the figure was 26

percent) and 2004 (when it fell to 5 percent). As 2003 was the year in which flat rate

buying was introduced, this shows that farmers adapted to the new incentive system in

a single season. Another notable fall in quality (principally affecting the proportion of

B grade cotton) occurred in 2006, a year of exceptional price competition between

companies. Thus, the share of seed cotton achieving grades A or B has fallen from 65

percent in 2003 to 20 percent in 2006.

Figure 8: Proportion of Seed Cotton Purchased by Motmate Designs

Proportion of Seed Cotton Purchased by Motmate Designs, by

Grade and Year (source: Motmate Designs)

0%

10%

20%

30%

40%

50%

60%

70%

2003 2004 2005 2006

Year

Grade A

Grade B

Grade C

Grade D

Meanwhile, in the focus group discussion in Mutamburigwa, respondents

acknowledged that farmers make much less effort to grade their seed cotton now that

they are not rewarded for the extra effort. They reported that, in years gone by, they

would harvest using two containers – one for good cotton and one for poor (e.g. insect

damaged) cotton. Before sending it to the buying post, they would then further grade

the good cotton to try and separate out that which they believed could achieve grade A.

42

This has EPZ status, so is officially known as Motmate Designs.

41

They no longer bother to do this. At the same time, some rural residents with little or no

cotton have begun collecting up the scraps of seed cotton that get stuck on bushes or

dropped around buying posts – and are able to sell this!

4.7.Pricing of Seed Cotton

In previous sections we have highlighted concerns over credit repayment and quality

control arising from the rapid new entry into the Zimbabwe cotton sector starting in

2001/02. However, one area where a more competitive sector would normally be

expected to perform better than a concentrated one is in the area of seed cotton pricing.

Table 7 calculates the share of the f.o.b. lint price received by producers in the years

immediately prior to, and since, liberalization. According to Baffes 2001 (Table 5.7,

p179), the prices paid by Cottco during the early 1990s were unrivalled in Africa.

However, the figures reported in Table 7 for the 1992-95 period are considerably lower

than those presented in Baffes 2001, albeit still higher than prices in Francophone

Africa at the same time.

An immediate positive impact of liberalization was the move to instant cash (or

cheque) payments upon weighing and grading of delivered seed cotton, an initiative

introduced by Cargill. Prior to liberalization, farmers had to wait for any time between

two weeks to several months before they received cheques from the CMB headquarters

in Harare.

In the years immediately following liberalization, Cottco exercised informal price

leadership within the sector (Hanyani-Mlambo et al. 2002). There were also a number

of reasons for Cottco to pay attractive seed cotton prices to producers. These included:

Awareness that the loss of much of the CMB’s commercial farm supply base

occurred because of the unattractive prices paid in the late 1980s;

The need to make cotton attractive to thousands of new smallholder producers;

The need to keep ahead of new entrants Cargill and Cotpro.

The picture painted by Table 7 is of a sector that paid modest prices in the first couple

of seasons after liberalization, when the A Index lint price was high but falling, but

which became much more generous in its pricing during 1997-2000. In 1998 there was

a significant depreciation in the real exchange rate, which enabled companies to

support the seed cotton price (indeed, to raise it in real terms) even though the A Index

lint price was now quite low.

Comparing the performance of cotton sectors in Zimbabwe, Zambia, Tanzania and

Mozambique in the years 1998-2002, Poulton et al. 2004 concluded that the

concentrated sectors (Zimbabwe, Zambia) had performed better than the others in terms

of input supply and quality control while at the same time delivering prices to

producers that were as attractive or – in the case of Zimbabwe – more attractive than

even the highly competitive Tanzanian sector. On the evidence of Table 7, the time

period chosen for this comparison was quite fortuitous for the Zimbabwe sector.

42

Table 7: Seed Cotton Prices and Producer Shares of c.i.f. Lint Price, 1990-2006

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Seed Cotton Price ZW$ / kg 1.35 1.63 1.35 2.62 3.20 3.70 4.20 6.00 9.00 15.00 18.00 28.00 57.00 400 1800 4500 80000

Seed Cotton Price US$ / kg 0.53 0.44 0.26 0.40 0.39 0.43 0.42 0.49 0.37 0.37 0.33 0.21 0.14 0.19 0.29 0.16 0.28

A Index Price + premium US$ / kg 2.01 1.53 1.40 1.71 2.28 2.07 1.90 1.75 1.43 1.28 1.38 1.01 1.32 1.62 1.21 1.28 1.32

Ex-ginnery Price (f.o.t.) US$ / kg 1.79 1.31 1.18 1.49 2.06 1.85 1.68 1.53 1.21 1.06 1.16 0.79 1.10 1.40 0.99 1.06 1.10

Payment to Producers US$ / kg 1.33 1.10 0.65 1.00 0.97 1.07 1.05 1.23 0.93 0.92 0.82 0.52 0.35 0.48 0.73 0.39 0.71

Producer Share of cif/cfr % 66% 72% 47% 59% 43% 51% 55% 70% 65% 72% 59% 52% 26% 30% 60% 30% 54%

Producer Share of f.o.t. % 74% 84% 55% 67% 47% 58% 62% 80% 77% 87% 71% 66% 32% 34% 74% 37% 64%

Assumptions: 10% premium over A Index price until 2002, then 2% loss per year since; 10c/lb difference between c.i.f. and f.o.t.; ginning out-turn ratio = 40%

Note: Annual average exchange rate figures are used for 1990-2000, based on Ndlela and Robinson 2007. From 2001, July figures are used, based on information

from RBZ and private sources.

Figure 9: Real Seed Cotton Price and Exchange Rate Adjusted Lint Price,

Zimbabwe 1990-2006

Real Seed Cotton Price and Exchange Rate Adjusted Lint Price, Zimbabwe 1990-2006

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Seed

Co

tto

n P

rice

(co

nsta

nt

1990 Z

W$ /

kg

)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

A I

nd

ex P

rice *

Real

Exch

. R

ate

(1990 Z

W$

/ kg

) Seed Cotton Price

(1990 ZW$)

A Index Price *

Real Exchange

Rate

Liberalization

43

The pricing performance of the Zimbabwe sector changed dramatically again after

2001 when economic and political crisis began to wreak havoc with the real exchange

rate. The declaration of the fast-track land redistribution program was disastrous for

Zimbabwe’s foreign exchange receipts, both because foreign investment dried up and

because the tobacco sector, one of the main earners of foreign exchange, was

particularly affected by land invasions. Thus, while the official exchange rate remained

pegged, a major parallel foreign exchange market opened up, which cotton companies

could deal in, at least in part. Foreign exchange shortages did, of course, eventually

feed through into domestic inflation, but only with a lag. Thus, during 2001 and 2002

there was a massive depreciation of the effective real exchange rate facing cotton

companies (Figure 2).

Figure 9 shows the effect of the real exchange rate movements on the ability of

Zimbabwe’s cotton companies to pay for seed cotton. A multiple of the A Index

international lint price and the real exchange rate expressed in 1990 terms is used as a

proxy for this. In 2002 movements in the real exchange rate totally eclipsed the fall in

the A Index lint price that occurred in this year as a determinant of companies’ ability

to pay for seed cotton. Figure 9 also shows the prices that Zimbabwean cotton

companies actually paid their producers, expressed in constant 1990 Z$. This highlights

the fact that, while companies’ ability to pay for seed cotton dramatically increased

during 2002, seed cotton prices tracked the A Index downwards.

As a result, Cottco recorded large increases in profits in 200243

, which clearly signalled

the attractiveness of the sector to other firms and encouraged the new entry recorded in

Table 2. Thanks to the continuing depreciation in the real exchange rate, further large

profits were recorded in 2003, despite the increase in the real seed cotton price paid to

producers.

One can only speculate as to why Cottco and Cargill set the prices that they did during

this period. Admittedly, predicting sensible prices in advance is extremely difficult

during turbulent economic times. However, both companies had continued the practice

pursued by the CMB of making two payments to producers: the first at the time of seed

cotton marketing and the second at the end of the calendar year, once most lint had

been sold and the financial performance of the company during the past production and

marketing seasons could be assessed. Thus, modest payments at the time of seed cotton

marketing could have been boosted by more generous second payments. Instead, profits

were largely retained44

. With hindsight, these decisions may appear short-sighted.

During the 2002 buying season, the new entrants into the sector generally set their seed

cotton prices higher than those offered by Cottco and Cargill. Thus, Farmers’ World

offered prices around ZW$50 per kg, whereas Cottco and Cargill opened at ZW$28-38

per kg. Following their second payments at the end of the year, Cottco and Cargill

farmers actually received a total of ZW$56 per kg. This was more in nominal terms

than was received by farmers who sold to Farmers’ World, although one should also

consider the effects of several months’ hyper-inflation on the value of the second

payments given by Cottco and Cargill. However, it was still considerably less than the

43

http://www.fingaz.co.zw/fingaz/2003/June/June12/4102.shtml provides an example of media reporting

these profits. 44

Cottco moved into Mozambique during this period, so these “windfall” profits may have partly funded

this.

44

ZW$70 per kg paid up-front by Dynamic Cotton (Hanyani-Mlambo et al. 2003). The

attitude of the established firms appeared to be that the limited capital of the new

entrants would limit their ability to capture market share, despite the attractive prices

that they were paying.

Figure 10: Seed Cotton Prices Paid in Muzarabani and Guruve Districts

Seed Cotton Prices Paid in Muzarabani and Guruve Districts,

2002/03

0

100

200

300

400

500

600

700

1 2 3 4 5 6 7 8 9 10 11 12

Week of Marketing Season

ZW

$/k

g

Cargill

Cottco

FSI Agricom

Dynamic

Bartco

Source: Hanyani-Mlambo and Poulton 2004

Figure 10 shows a similar picture for the 2003 buying season. Again, the established

firms did not attempt to fully match the prices offered by their newer competitors45

. It

is, therefore, debatable how far the new entry in 2002 and 2003 actually forced up the

prices paid by established companies. What the price discrepancies between established

and new companies did do was to stir up farmer dissatisfaction with the prices paid by

the established companies.

In 2004 Cottco and Cargill offered prices of Z$1800 per kg soon after the marketing

season commenced. However, encouraged by the Zimbabwe Farmers’ Union, many

farmers initially refused to sell their seed cotton at this price, claiming that it would be

insufficient to recoup their costs for seed, fertiliser and pesticide. Smaller companies

had initially offered prices in the range ZW$2100-2500 per kg, but then proved unable

to buy at these prices as the real exchange rate appreciated again almost as fast as it had

depreciated during 2002-03 (Figures 2 and 9). For the first time since liberalization, the

government (in the form of the Ministry of Agriculture) was drawn into deliberations

about the seed cotton price. At meetings at the Ministry in July 2004, a price of Z$1900

per kg was agreed for outstanding seed cotton purchases. However, by the time that this

45

By this time, even more so than in 2002, foreign exchange transactions were becoming a sensitive

subject. Cottco argues that, as a large and highly visible public company, they were subject to closer

scrutiny by the government over their foreign exchange transactions than their smaller competitors.

Similarly, Cargill have an international brand image to protect. Hence, neither could obtain the same

effective exchange rate as smaller competitors, which limited their ability to pay the same seed cotton

prices.

45

agreement was reached, most seed cotton had already been bought at the original price

of Z$1800 per kg. As Table 7 shows, even at Z$1800 per kg pricing in 2004 was

reasonably generous by the standards of most African cotton sectors.

In 2005 the seed cotton price was constrained by the exchange rate that the companies

could access their foreign currency at. Much of the price (ZW$3500 out of Z$4500 per

kg) was paid in the form of a subsidy from RBZ. Nevertheless, the price was in no way

generous.

In 2006 the target price suggested by companies at the NCC pricing committee

(ZW$28,000 per kg) was far from generous and negotiations were inconclusive. At the

start of seed cotton buying in April-May, farmers were given an initial payment of

ZW$5 million per bale, as a suitable price had not been agreed. Cottco then announced

prices around ZW$25,000 per kg, with other companies opening up to 30 percent

higher than this. However, fierce price competition soon kicked in, taking Cottco’s

closing price to ZW$105,000 per kg at the beginning of August (a tripling of the price

in real terms), with some of the smaller companies closing as high as ZW$145,000 per

kg.

Discussions with ginnery managers in Muzarabani and Gokwe South indicated that

farmers who could afford to hold onto their seed cotton resisted selling at the season’s

opening price. Farmers who did sell early received a subsequent payment (the real

value of which was greatly reduced by inflation) to bring their nominal payment to

ZW$50,000 per kg46

. However, Cottco purchased much of its seed cotton at around

ZW$85,000 per kg in late June and July. As Table 7 shows, prices in 2006 were not

particularly generous, but they were not as low as in some recent seasons.

The foregoing discussion shows that the seed cotton pricing performance of the

Zimbabwe sector has varied considerably from period to period. Table 8 attempts to

summarise this performance.

Table 8: Assessing Seed Cotton Pricing within the Post-Liberalization Zimbabwe Cotton Sector

Pre-

Liberalization

Post-

Liberalization

Tanzania

1980-1994 1995-2000 2001-2006 1995-2006 1995-2006

Share of f.o.t. 74% 72% 51% 62% 68%

Share of c.i.f. 65% 62% 42% 52% 59%

Note: Figures are simple averages of the shares calculated for each year within the period.

Contrary to most African experience, Table 8 shows that seed cotton pricing was most

generous in the pre-liberalization period – possibly a result of the continued (albeit

declining) lobbying power of commercial growers during these years (Jenkins 1997).

Seed cotton prices accounted for a similar share of lint prices in the immediate post-

liberalization years, but have declined as a share of the lint price since 2001. There are

two possible explanations for the fact that producer price shares have remained lower

despite increased competition in recent seasons:

There have been unavoidable increases in company costs as a result of

economic crisis. While we would expect this to some degree, our analysis of

46

Motmate Designs in Gokwe made these supplementary payments on 30% of their total seed cotton

purchases in 2006.

46

company costs (section 5.1) finds at best limited support for this. Instead, there

are costs that appear to be lowered in US dollar terms by distortions in the

current Zimbabwe economy.

The entry of numerous, but mostly small, new firms has had only limited impact

in raising seed cotton prices. This is the corollary of our assessment that it is the

huge depreciation in the real exchange (Table 2), little of which has been passed

onto producers, that explains the falling producer share of lint value since 2001.

We do not deny that increased competition has made a difference to prices on

some occasions, for example towards the end of the 2006 buying season, when

there was something of a scramble for the final available seed cotton. However,

new firms would have to be larger and financially stronger than they are now to

raise the average seed cotton price received by producers season by season.

By contrast, we note that the even more competitive Tanzanian sector, where there are

no dominant firms, has performed better than the Zimbabwe sector on seed cotton

pricing over their (shared) post-liberalization period (Table 8). However, the share of

the lint price received by Tanzanian producers over this period is actually below that

received by Zimbabwean producers in both the pre-liberalization and immediate post-

liberalization years. Comparative seed cotton prices are explored further in the

accompanying synthesis report to this project.

5 . C o s t C o m p e t i t i v e n e s s , R e t u r n s t o P ro d u c e r s

a n d S u s t a i n a b i l i t y

This section relies heavily on two sets of budgets, calculated during fieldwork in early

2007:

An illustrative ginner’s budget, that attempts to summarise the costs incurred by

a medium-sized ginnery in assembling and ginning seed cotton in 2006;

Illustrative budgets for seed cotton production by each of the three farmer types

identified during focus group discussions.

5.1.Processing and Marketing Costs in Zimbabwe

Our illustrative ginnery budget is presented in Appendix Table 1. This is compiled

from a range of information sources and so does not reflect the costs at any specific

ginnery. Given the instability in the Zimbabwe economy - in particular, the volatility of

both domestic prices and foreign exchange rates - we emphasise that such figures

should be interpreted with some caution.

Local currency costs are converted into US dollars using an effective exchange rate, i.e.

weighted average of official and parallel exchange rates, that varies by month. The

official rates have been obtained from RBZ. The parallel rates are the mean of two

series obtained from independent sources47

. The monthly exchange rates used are

presented in Appendix Table 5.

47

Over the period January 2006 to February 2007, the means of the monthly values in the two series are

equal. However, one series recorded higher values than the other (ratio = 1.2-1.4) during the critical

months of May-July 2006. Choice of exchange rate during these months influences both one’s

assessment of the 2006 seed cotton price and the total estimated export costs of Zimbabwean lint.

47

Assumptions underlying the budget are presented in Appendix Table 1 panels A-B.

Attention is drawn to the unusual financing costs and also to the very low prices for

electricity, which reflect the fact that ZESA prices are controlled by the government

and appear to be based on the official exchange rate. In a later section, we show the

extent to which the ability to access some cheap finance was important for company

profitability in 2006 (Table 10).

Comparison with ginning costs in other African countries suggests that, in US dollar

terms, ginning in Zimbabwe is currently very low cost. This should not come as a

surprise, however, given the major depreciation of the real exchange rate that has taken

place in recent years (Figure 2).

Attractive prices for cottonseed, a result of the deficit situation in the oil sector that was

described in section 3.7, more than offset ginning costs. Note, however, that the toll

ginning rates charged to companies without their own ginneries – 8-10c per kg of seed

cotton – were almost double the revenue from the resulting seed sales.

Comparison of the ex-ginnery f.o.t. cost with the lint price paid by the domestic textile

industry suggests that the ginnery would just about have broken even on the 30 percent

of lint sales that it was required to sell locally. However, given the level of uncertainty

over the figures, it is possible that some ginneries made a loss on these sales.

Meanwhile, the c.f.r. (Far East) cost is comfortably under the A index price (even

without premium), so overall the ginnery would have made a profit on its operations.

This may shed some light on the continued entry into the Zimbabwean cotton sector

(Table 2) despite the wider economic difficulties.

Overall, this analysis suggests that, despite the practical difficulties of operating in a

highly distorted and dysfunctional economy, and even with the strong competition for

seed cotton in 2006, the Zimbabwe cotton sector remains cost competitive on the

international market. The main reason for this is the depreciation of the real exchange

rate that has taken place in recent years. However, some additional distortions, such as

artificially low electricity prices and loans at negative real interest rates from

commercial banks, also help keep costs down.

5.2.Cost Competitiveness at Farm Level

Farmer production budgets for each of the farmer types identified by the focus groups

are presented in Appendix Tables 2-4. Separate budgets were prepared for Muzarabani

and Gokwe South, but there were no notable differences in the principal outcome

indicators. Therefore, just the Gokwe South budgets are presented here. We note that

these budgets assume higher seed cotton yields than are compatible with national

average data and also larger areas planted to cotton than are compatible with the 2002

and 2004 farmer surveys (section 3.3). Thus, they should perhaps be thought of as “best

case” budgets.

Attention is drawn to the seed cotton prices received by the different groups of farmers.

In line with information provided during the focus group discussions, all groups are

assumed to make some early sales of seed cotton either because of pressing cash needs

or to begin loan repayment. However, it is the poorest group (group 3) who sell the

48

highest proportion of their harvest at these opening prices. They, therefore, receive an

average price for their seed cotton that is well below the sector average price quoted in

Table 7. This reinforces the effect of low yields on the profitability of their cotton

production activities. According to the focus groups, it is only the top group who are

able to retain any of their seed cotton until the very end of the buying season when

prices are (normally) highest. Thus, they receive an average price for their seed cotton

that is above the sector average price quoted in Table 7. This reinforces the effect of

high yields on the profitability of their cotton production activities.

Table 9: Analysis of Costs and Returns from Farmer Budgets (US$)

Group 1 Fertilised With Manure Overall

per acre per acre whole farm

Gross Revenue 218.39 124.79 3431.82

Margin After Payment of Inputs 123.65 94.61 2182.53

Input Cost / Gross Revenue 0.43 0.27 0.36

Gross Margin (excl family labour) 84.42 60.64 1450.54

Returns to family labour 6.3 5.5 5.9

Net Margin (after family labour) 70.94 49.61 1205.54

Cost per kg 0.21 0.19 0.20

Household Size 8

Income per capita 181.32 PPP US$ 736.05

Group 2 per acre

Gross Revenue 91.26

Margin After Payment of Inputs 55.23

Input Cost / Gross Revenue 0.39

Gross Margin (excl family labour) 30.39

Returns to family labour 2.0

Net Margin (after family labour) 14.82

Cost per kg 0.24

Household Size 5

Income per capita 45.59 PPP US$ 185.07

Group 3 per acre

Gross Revenue 58.03

Margin After Payment of Inputs 38.60

Input Cost / Gross Revenue 0.33

Gross Margin (excl family labour) 38.60

Returns to family labour 0.9

Net Margin (after family labour) -3.85

Cost per kg 0.26

Household Size 3

Income per capita 25.74 PPP US$ 104.47

Source: focus group discussions

Table 9 presents a number of indicators of costs and returns that can be derived from

these budgets. The “gross margin (excluding family labour)” is derived by deducting

the value of hired labour and services (e.g. ploughing or transportation) from the

“margin after payment of inputs”. The “net margin (after family labour)” is derived by

deducting an imputed value of family labour – taken as US$1 per adult per day – from

49

the “gross margin (excluding family labour)”. The conversion factor for the PPP US$

income figures is given in Appendix Table 6.

From Table 9, we note that:

Costs of production per kg of seed cotton are lowest for the most productive

group and highest for the lowest producers. This is in line with what is found in

the other country studies.

A third or more of farmers’ gross revenue from cotton is accounted for by input

costs. This figure rises with the intensity of production, but the ratio is a third

even for the smallest producers. This implies a considerable degree of risk.

5.3.Return to Farmers and Poverty Alleviation Considerations

Minot and Daniels 2002 explored the impact of international (US and EU) cotton

subsidies on poverty in rural Benin, given their effect of lowering the seed cotton price

that companies in Benin could afford to pay to producers. They estimated, using

nationwide household survey data, that a 40 percent decline in the farm-gate price of

seed cotton led directly to an additional 6-8 percent of rural households falling below

their chosen poverty line. Overall, they concluded that, “… there is a strong link

between cotton prices and rural welfare in Benin. … to the extent that fluctuations in

world cotton prices are transmitted to farmers, they will have a significant effect on

rural incomes and poverty.” (p50-51).

Using programming models for representative household types to explore similar

questions for the case of Zimbabwe in 2002, Poulton 2005 estimated that a 40 percent

increase in the seed cotton price would have reduced the proportion of households

within the relevant population (i.e. the cotton growing areas of the country) that lived

below the local poverty line from 55 percent to 42 percent. This shows the importance

of cotton production to regional, if not national, poverty reduction. We note here that,

according to the evidence presented in this report, changes in outcomes for farmers of

this sort of magnitude can occur as a result of changes in internal, sectoral policy – not

just changes in the external environment.

Table 9 provides insights into the well-being status of different types of cotton

households and how they might be affected by changes in the performance and

efficiency of the Zimbabwe cotton sector. From this table, we observe the following:

Returns to labour are attractive for group 1 households, where household labour

is essentially a managerial input supervising hired labour. As already noted,

these households benefit both from the highest seed cotton yields and the

highest average seed cotton price.

By contrast, the returns to labour achieved by the smallest producers are

fractionally below what would be obtained from hiring out labour to others.

During times of peak labour demand, these households prioritise the hiring out

of their labour (to group 1 and group 2 households), fitting labour input onto

their own cotton plots into spare hours in the later afternoon or on days when

they have been unable to hire their labour out. As a result, key tasks such as

weeding tend to be done either late or in a very cursory manner, to the detriment

of eventual yields.

50

When converted into purchasing power parity dollars, the income per capita

from cotton production (net of input costs, but excluding the cost of family

labour) for group 1 households makes them clearly non-poor in MDG terms.

The income that group 2 households obtain from cotton is substantially less

than one dollar per household member per day. However, these households

“only” devote about half of their cultivated land to cotton (Table 1) and do have

small quantities of livestock, although it was reported in focus groups that few

have access to income from wages, business or remittances. It is likely that

these households are distributed around the international poverty line, so

changes in sectoral policy could have a big impact on their “dollar a day”

poverty status.

Group 3 households are clearly poor in MDG terms. Cotton production plays an

important part in their current livelihood strategies, but multiple asset and cash

constraints limit the extent to which they can respond to better prices - or even

services - in the short term48

. Thus, taking a comparative statics approach, most

are likely to remain poor under any plausible scenario of enhanced cotton sector

performance. On the other hand, there is a strong lifecycle effect in the well-

being of group 3 and 4 households, the majority of whom are either young or

elderly. For young households, the direct but dynamic benefits of enhanced

cotton sector performance would come in the form of increased ability (at the

margin) to save and invest in assets (such as livestock and ploughing

equipment) that over time would permit them to climb out of poverty. For

elderly households, direct income support is likely to be a better approach to

enhancing well-being than changes in productive sectors.

As well as enhancing the incomes of those producing cotton on their own account,

improved cotton sector performance should raise demand for hired labour in cotton

producing zones. The farmer budgets indicate that group 1 households hire in

considerably more labour than they apply themselves to their cotton plots, while group

2 households are also regular hirers of labour (although some household members may

also hire labour out). Young group 3 households are likely to experience useful indirect

benefits of enhanced cotton sector performance in the form of increased demand for

their labour. As their returns to labour on the own cotton plots will simultaneously be

raised, this increased demand for labour is very likely to translate into higher wages for

casual agricultural labour49

. Focus group participants in Zharare (Gokwe South) also

48

Lack of draft power means that they tend to plant late, which reduces their potential yield right from

the outset of the season. While access to more inputs would raise their expected yields above current

levels, cash flow problems that force them to hire their labour out at key times would reduce the returns

that they could obtain from these additional inputs. 49

In focus group discussions in Muzarabani, respondents make several references to increased labour

costs and shortages over the past few years. This may be related to the land resettlement programme,

through which people from the area have been given land on former commercial farms, but respondents

also noted that group 1 households had been expanding their cotton production (as a response to falling

returns in a situation where there were few alternative income earning opportunities) and hence

demanding more labour. Farmers in Muzarabani are currently rather agitated about the regulation that

requires them to clear their land of old cotton plants by August 15th

each year. While vital to national

efforts to control pink bollworm (Mariga 1994), they complain that the statutory date enables hired

labourers to demand whatever wages they wish, as so many farmers are looking to hire labour at the

same time.

51

noted that, at harvest time, labourers come from the neighbouring district of Binga to

gain employment through cotton picking.

Both Minot and Daniels 2002 and Poulton 2005 highlight the fact that the extent to

which farm households switch in and out of cotton production is critical to the impact

of changes in sector performance on household well-being. Perhaps counter-intuitively,

the more readily households switch in and out of cotton production, the smaller the

impact on household well-being of a given change in cotton production. The focus

group discussions in Muzarabani and Gokwe South indicated that farm households

have relatively few alternative income earning opportunities outside cotton (the shares

of cultivated land dedicated to cotton, that are reported in Table 1, illustrate this well).

Maize is the second most important crop in all cases, followed by groundnuts and

sometimes small grains.

Muzarabani is, in an ideal world, too hot and dry for maize. Thus most households –

even group 1 households – are deficit in maize, relying on cotton income for maize

purchase. The Muzarabani focus groups reported that some fertilizer intended for

cotton (an estimate of 25 percent was given by one group) gets diverted to maize

production to try to reduce the deficit. In Muzarabani, groundnut production has been

increasing in recent years, although it remains distant second to cotton as a cash crop.

Informal traders come to the area during the groundnut harvest, ultimately taking the

(shelled) final product to markets as far away as Botswana. In the past, the unreliability

of the market has been a constraint on groundnut production, but a virtuous circle may

now be beginning to develop, whereby increased production and increased number and

predictability of visiting traders reinforce each other. Cattle are relatively plentiful in

Muzarabani, although ownership is concentrated within group 1 households, with some

group 2 and older group 3 and 4 households also owning cattle. For all except those

with the largest herds, cattle sales are in response to particular cash needs (including

farm input purchase), rather than a regular income stream.

Land in Gokwe is divided into two main soil types: highly fertile black vertisols and

more sandy soils. The presence of the former means that many households in groups 1

and 2 are net maize sellers in an average year, while perhaps half of group 3 households

hope to attain maize self-sufficiency. This more secure food situation means that, when

the Grain Marketing Board (GMB) distributes subsidized fertilizer for maize

production (mainly to the larger and better connected producers, apparently), some of

this is likely to be diverted to cotton production50

. Cotton fertilizer is not diverted onto

maize.

Poulton 2005 found that larger cotton producers, with good access to inputs for cotton

production on credit, were less likely to switch into and out of cotton production in

response to short-term changes in sectoral performance than smaller producers, whose

incentive to produce cotton was heavily dependent on the seed cotton price. Anecdotal

support for this was provided by the focus group in Mutamburigwa (Gokwe), which

noted that, amongst group 3 households, occasional non-growing of cotton is not

uncommon. However, no household will ever go three seasons without growing cotton,

because it is the only cash crop of note in the village.

50

GMB also buys at low, controlled prices, which discourages net sellers from investing in extra maize

production.

52

These observations support the view that improvements in the efficiency and

performance of the cotton sector will have significant welfare benefits in the main

cotton growing zones of Zimbabwe, although the direct benefits are most likely to be

captured by group 1 and group 2 households.

Finally, while it is impossible to gain any reliable information on trends through a brief

visit, the growth of the Gokwe “growth point” over the past decade is an impressive

testimony to the multiplier effects of an expanding cotton industry. The town boasts

numerous new businesses, including two medium-sized Spar supermarkets, and plenty

of ongoing residential construction, including houses being built in town by cotton

farmers from surrounding villages investing the proceeds of their cotton production.

We are less clear about the medium-term trend in Muzarabani, but observe that there

has been little visible development here since we commenced survey work in 2002.

Indeed, some businesses have closed since 2004, reflecting the difficult overall

economic climate, but also that cotton production in the area has not been sufficiently

vibrant to offset this.

5.4.Sector Sustainability

As with the national economy more generally, the cotton sector in Zimbabwe has been

going through challenging and uncertain times recently. However, as emphasized in

this report, the challenges facing Zimbabwe cotton are not simply those of navigating

through the more general economic crisis. Rather, they concern the sector’s response to

its own changed structure and dynamics. Specifically, can it develop a regulatory

framework appropriate to the new, more competitive market for seed cotton? The

answer to this question will determine whether it can respond to more specific issues of

sustainability within the sector.

At the farm production level, many group 1 and some group 2 households have been

using inorganic fertilizer on their cotton for years. Use of manure directly on cotton

plots is less common than application of inorganic fertilizer, but this is slightly

misleading. According to the 2004 household survey, only 15 percent of cotton

producing households applied manure on their cotton plots in 2004 (Hanyani-Mlambo

et al. 2005). Appendix Tables 2-4 indicate that it is mainly group 1 households that

apply manure, this being related to ownership of cattle and hence access to manure (as

it is only possible to buy manure in one of the four villages where focus group meetings

were held). However, focus group participants explained that extension advice has

traditionally been that manure should be applied onto a maize plot, with cotton grown

on that plot the following year as part of a rotation. Many group 1 and group 2

households (and older group 3 households that have cattle) do this.

It also appears that group 1 households are increasing their manure application directly

onto cotton plots. This may be a response to decreasing availability, and increasing

cost, of inorganic fertilizer. Manure availability was raised as the major constraint on

households’ ability to increase manure application. In Muzarabani, respondents stated

that livestock sales to meet pressing cash needs in the difficult economic environment,

plus periodic droughts, had prevented an increase in cattle numbers, hence constraining

manure use.

53

When focus group participants were asked about trends in seed cotton yields in their

areas, the responses were mixed. Some claimed that yields were falling, but either cited

factors beyond their control (e.g. deteriorating rainfall patterns) or short-term problems

linked to national fertilizer scarcity. In Zharare (Gokwe), by contrast, respondents were

upbeat about their ability to manage their soils (this was the only village of the four

where some households are still able to fallow land) and claimed that the yield trend

was upwards.

While the insights gained from focus group discussions are at best only indicative, the

anecdotal evidence presented here does not suggest that soil fertility constraints are

about to undermine the profitability of cotton production in Zimbabwe’s main

smallholder cotton production zones. However, institutional arrangements to enable

cotton companies to support inorganic fertilizer use by cotton producers have come

under strain recently and are still a topic of considerable debate within the sector. We

return to this in section 6.

A similar comment applies to the institutional arrangements supporting quality control

within the sector. The newer companies are accused by established players of

embarking on the “Tanzanization” of the Zimbabwe cotton sector, i.e. moving it

towards a lower cost, but lower yielding and lower quality, position within global

markets. There would almost certainly still be a market for such cotton, so in that sense

it would not mean the demise of the sector. However, it would be disastrous for both

Cottco and Cargill; the former because its business is built on the production of high

quality cotton and its overhead costs undoubtedly reflect that, the latter because the

attraction of Zimbabwe within its global portfolio of cotton assets is as a complement

to (or, if necessary, substitute for) high quality Australian lint. Cargill can readily

source low quality cotton from elsewhere.

Whether a higher yielding and higher quality model or a lower cost, but lower yielding

and lower quality, model is better for Zimbabwe as a whole is an interesting question.

Using the 2002 household survey data within a household modeling approach, Poulton

2005 compared production and livelihood outcomes for seven Zimbabwean household

types in Muzarabani and Gokwe South from two scenarios:

The actual set of cotton prices and services observed in 2002, and

A hypothetical alternative scenario under which competition bid the seed cotton

price up by 40 percent, but undermined credit recovery – and hence credit

provision – within the sector. (Recall that only the top 40 percent of households

had access to credit in 2002).

These simulations suggested that poverty rates across the two areas would be almost

identical under the two scenarios, as low-middling households lost nothing from the

disappearance of credit provision, but gained from higher prices, while larger

households were unable to sustain previous levels of cotton production without the

access to company credit, despite the higher prices received. Strikingly, however,

cotton production halved under the second scenario, with the decline not compensated

for by increases in other crops. This suggests that the former scenario is more desirable

from a national perspective. It may also be more desirable from a poverty reduction

perspective once various multiplier effects are taken into consideration. Unlike in

Tanzania, where there is still plenty of room for cotton production expansion, even

54

under a fairly extensive production model, it is unlikely that the communal areas of

Zimbabwe could sustain current cotton production levels under a less intensive mode of

production. (See section 3.2 for a discussion of resettlement and cotton production).

Finally, the performance of the research system was considered in section 4.3.

Improved cotton varieties are still being developed in Zimbabwe and other

complementary research is being undertaken. However, there are important decisions

looming regarding the future organization of the cotton research system.

6 . C o m p e t i t i o n v s C o o r d i n a t i o n

In this section we do two things. Firstly, we use the ginnery budget that was introduced

in section 5.2 to investigate why companies that achieve higher premia for their lint on

the international market are nevertheless still unable to match the seed cotton prices

offered by “lower cost, lower quality” firms. This provides important insights into the

sustainability of the higher yielding and higher quality model, discussed in the previous

section, and into the policy distortions affecting competition within the cotton sector.

We then discuss the NACGMB’s proposals for managing seed cotton buying in 2007 in

the light of our focus group discussions and our analysis so far in this report.

6.1. Quality Premia, Input Support and Other Determinants of the Ability to

Pay for Seed Cotton

Taking the ginnery budget presented in Appendix Table 1 as a starting point, we can

explore the impact that various changes to policy or to company practice have on a

company’s profitability and/or on the seed cotton price that it can afford to pay. Six

such simulations are reported in Table 10.

For each scenario, three outcome indicators are reported:

The profit achieved per kg of lint produced, assuming the seed cotton prices

paid to producers remain unchanged from those reported at the bottom of

Appendix Table 1 panel A. This is a weighted figure, given that, in most

scenarios, 30 percent of lint has to be sold at a subsidized price on the domestic

market;

The mean seed cotton price that could be paid to farmers, holding profit per kg

of lint constant at its base level;

The mean price at which later (i.e. July) seed cotton price purchases could be

made (to give the afore-mentioned average), assuming that the prices for the

first 60 percent of purchases in May and June remain unchanged from those

given in Appendix Table 1 panel A.

55

Table 10: The Impact of Selected Policy Changes on Company Profitability and Ability to Pay for

Seed Cotton

Scenario Retaining Same Profit Level

Profit per

kg of lint

(US$)

Mean Seed

Cotton Price

Payable (US$/kg)

Mean July Seed

Cotton Price

(Z$/kg)

0 Base 0.19 0.28 91250

1 No domestic financing 0.12 0.25 72500

2 No pre-harvest support 0.33 0.34 136250

3 Loan Default = 80% 0.15 0.26 81500

4 100% forex retention 0.27 (0.26) 122500

5 No domestic lint sale 0.26 0.31 115000

6 Pre-2001 Seed Cotton Quality Levels 0.23 0.29 102500

Scenario 1 is a sensitivity analysis considering the impact on company costs of not

being able to access financing from local commercial banks, which, as was pointed out

earlier, carried a negative real interest rate in 2006. This would have had a large,

negative impact on company profitability in 2006 and/or would have reduced the mean

seed cotton price that could have been paid by 10 percent.

Scenario 2 is at the heart of current debates about governance of Zimbabwe’s cotton

sector. It shows the competitive advantage that can be gained by a firm that does not

support pre-harvest cotton production activities, but simply enters the market to buy at

harvest time, free-riding on the promotional efforts of others. (The calculation is

obtained by setting the first five rows of Appendix Table 1 panel D to zero). Scenario 2

suggests that, other things being equal, a firm that does not provide pre-harvest support

to cotton producers can pay a 21 percent higher average seed cotton price than a

company that does. Clearly, the playing field is not equal where not all firms provide

pre-harvest support.

Scenario 3 shows the impact on company profitability and ability to pay for seed cotton

of a fall in the rate of recovery of pre-harvest loans. We simulate a fall to 80 percent,

but actually suspect that some newer companies have never yet achieved this rate. For

an established company that would have expected to achieve loan recovery of 90

percent or more before the increase in competition within the sector, the fall reduces

total profits by over 20 percent.

Scenario 4 is equally pertinent to current debates about governance of the Zimbabwe

cotton sector. It shows the extent to which firms that can retain 100 percent of their

foreign exchange earnings have a competitive advantage over firms that have to

surrender 30 percent to RBZ at the official exchange rate. We calculate this by using

the parallel exchange rate, rather than the effective rate, for all foreign currency

conversions within the budget spreadsheet. This means that the cost of tradable inputs

rises (in local currency terms) in the same proportion that the value of output does.

However, the cost of domestically sourced inputs that are paid for in local currency

falls relative to the value of output. This change has an impact on profitability and on

the ability to pay for seed cotton that is second only to the non-provision of pre-harvest

services. While the average seed cotton price appears to fall, if expressed in US$ terms,

this is only because this scenario uses a different exchange rate.

56

Scenario 5 investigates the impact of not having to sell lint at a subsidized price to the

domestic textile industry. This increases profitability and the ability to pay for seed

cotton by almost as much as 100 percent retention of foreign exchange earnings.

Finally, scenario 6 investigates the benefits that would be obtained by returning to a lint

quality profile similar to the one that the established companies enjoyed prior to 2002.

Specifically, in Appendix Table 1 panel C we set the share of lint receiving each of the

first three premia to 0.3 and the share of lint not receiving a premium to 0.1. We also

make small reductions in costs to allow for reduced staff costs in pre-sorting seed

cotton at the ginnery and reduce wastage to 0.3 percent. However, we have not

included savings in investment in lint cleaners. The significant finding from this

scenario is that the impact on profitability and on ability to pay for seed cotton is lower

than under any of scenarios 2, 4 or 5. Thus, firms wishing to pursue a high quality lint

strategy would be unable to reward producers sufficiently for maintaining high quality

standards when confronted by competition from companies pursuing a low quality

strategy but either not providing pre-harvest support services, avoiding domestic lint

sales or benefiting from 100 percent forex retention51

.

The clear conclusion from these simulations is that, if Zimbabwe policy makers wish

the national cotton industry to maintain its historic “high yielding and high quality”

profile, then some degree of regulation will be necessary to enforce this. Otherwise,

such a strategy, if pursued privately by individual companies but not adopted by the

sector as a whole, will be non-viable, as companies free-riding on the input provision

efforts of others will be able to pay more for seed cotton than firms engaged in input

provision, even if the latter obtain higher price premia on international markets than the

former. Such a strategy will be further undermined by the persistence of loopholes,

such as 100 percent forex retention for some firms and not others, that mean that the

playing field for seed cotton purchase is not level.

6.2.Proposed Arrangements for the 2007 Harvest

If Zimbabwe policy makers wish the national cotton industry to maintain its historic

“high yielding and high quality” profile, then some degree of regulation will be

necessary to enforce this. However, there is still room for debate on the nature of

regulation that might be appropriate or desirable.

By the time this report is presented to sector stakeholders, the success or otherwise of

measures taken to govern seed cotton buying in 2007 will already be known. By

contrast, these remarks are being written in advance of the 2007 harvest, so are

unavoidably somewhat speculative. We will, therefore, keep them brief.

Our understanding of what NACGMB is proposing for seed cotton buying in 2007 is as

follows:

By April 2007 all companies will have submitted to NACGMB evidence of the

number of farmers that they have supported with pre-harvest services during the

2006/07 season and the extent to which they have supported them;

51

This is even without taking into account the consequences of lower capacity utilization that could

result from adopting a tougher line on quality control.

57

On this basis, they will be assigned fairly tightly specified shares of the total

harvest that they can buy in 2007;

A common seed cotton price will be agreed through the pricing committee, in

collaboration with representatives of the farmers’ unions.

Assuming this is correct, it represents a major swing of the pendulum away from the

competition that prevailed in 2006 and towards coordination. In key informant

interviews, we have heard the argument that such a swing of the pendulum is necessary

to restore some order within the Zimbabwe sector – even if the pendulum then has to

swing part of the way back later to reintroduce competition in seed cotton pricing.

However, would the regime set out above be a swing too far?

We raise the following concerns:

The first is a very practical one, derived from the observation that companies

have provided radically different levels of support to their farmers (Table 6). If

all companies provided equal packages to all farmers, then allocation of market

shares would be easy. However, it is less obvious how one weighs the impact

on production of provision of seeds and limited chemicals on the one hand and

a full input package on the other. Such calculations are further complicated by

the fact that the established companies have their own competitive advantage,

derived from years of operating in the sector: they know, and have built

relationships with, the most productive farmers.

A second practical concern is that an approach that divides the market up too

rigidly based on provision of inputs on credit actually discourages the cash sale

of inputs by companies at harvest time. (This creates “free” farmers, who are a

problem for a tightly regulated system!). However, focus group participants in

Muzarabani emphasized that some farmers would like to be able to purchase

inputs at harvest time, given the sky-rocketing inflation. If inputs are paid for in

advance, they don’t have to worry about what they will be charged for them at

the end of the season.

The next concern stems from the rather erratic past performance of the

Zimbabwe cotton sector with respect to seed cotton pricing (Table 7). In

particular, the last few years (since 2001) have seen more cases of disappointing

prices than of attractive ones. The two years that have bucked this trend have

been the two years of strongest competition (2004 and 2006). While in theory

the farmers’ unions can represent the interests of farmers in pricing discussions,

we have questioned their ability to do this (section 4.1). Moreover, in 2006, as

we understand it, the pricing committee did not reach agreement on a fair price,

while the price suggested by companies would have given farmers a very poor

deal (well below the 25 percent return on their investment that they are

supposed to get). Fortunately, competition took over and made the discussions

redundant. In 2007 there is a danger that this possibility will be “regulated

away”.

Finally, while we recognize that high quality pre-harvest services are probably

more effective at raising production than plausibly higher prices (section 5.3),

there is an additional dimension of farmer perceptions and the impact of the

new regime on the level of trust that exists between companies and farmers. In

the focus group discussions, it became clear that some farmers realize that in

58

recent years they have both “had their cake and eaten it”. The better off

producers have been able to take pre-harvest services from established

companies and sell some of their output to newer entrants for higher prices.

They are reluctant to see this loophole closed! Yet, beyond this they have tasted

some genuine benefits from competition and mistrust the motives of established

companies in closing that competition down. Particularly when world lint prices

are low, they look to competition to deliver them the best possible prices within

the limited scope available. A duopoly could pay farmers a modest share of the

c.i.f. price in 1995-96 and cotton was still a very attractive proposition for

farmers, as world prices were high. That is no longer the case. Companies may

be unwise to suddenly restrict competition too drastically in 2007.

Given these concerns, what can be done?

If NACGMB is set on implementing the regulatory regime outlined above, then it

would be wise for them to offer a generous seed cotton price within the pricing

committee as a gesture of goodwill and trust building towards producers. Alternatively,

some latitude should be left in the market shares allocated to individual companies on

the basis of their input support (for example, having the allocated shares only totalling

80 percent of the harvest), such that there is still some room for genuine price

competition at harvest time.

Of course, as emphasized earlier, efforts should continue to close down other loopholes

that distort the playing field between companies at harvest time, such that established

companies have less to fear from competition for seed cotton.

7 . L e s s o n s L e a r n e d

Zimbabwe provides a “natural experiment” in what happens when sectoral structure is

changed within an already liberalised African cotton sector. In contrast to assessments

of the impact of initial sector liberalization, this helpfully separates out the influence of

the change in sectoral structure from that of the shift from public to private ownership.

Unfortunately, Zimbabwe’s “natural experiment” has occurred at a time of great macro-

economic instability, so we instead have to try and separate out the impact of the

change in sectoral structure from that of macro-economic instability!

Our basic assessment of the link between macro-economic instability and sectoral

dynamics is as follows:

The main impact of macro-economic instability on the cotton sector has been

through changes in the real exchange rate. The Zimbabwe case dramatically

highlights the importance of the real exchange rate on the profitability and

performance of a commodity sector such as cotton;

The initial fall in the real exchange rate during 2001-2003 created conditions

whereby companies could increase profits (albeit under considerable

uncertainty), as the benefits of the exchange rate change were not passed onto

producers. Prior to this, producers had received a very high share of world lint

prices. The high profits that companies reaped during 2001-2003 sent a signal

that encouraged many other companies to enter the sector.

59

Continued falls in the real exchange rate mean that the Zimbabwe sector

remains cost competitive in US dollar terms, despite inevitably higher costs

arising from the demands of operating in a highly distorted and unstable macro-

economic environment. In addition, some of the current distortions within the

Zimbabwe economy, such as artificially low electricity prices and loans from

commercial banks at negative real interest rates, also help keep costs down.

Thus, the number of companies continues to increase.

Turning to the impact on performance of the change in sectoral structure, we note three

main findings:

Increased competition for seed cotton has had a major negative impact on seed

cotton and lint quality (section 4.6). In section 6.2 we provide some explanation

for this: the profits that companies can obtain from pursuing a “high input, high

quality” strategy amongst their smallholder growers are not as high as those that

can be obtained from free-riding on input provision by others, even if the free-

riding firm then receives a lower price from its lint sales. Such a strategy will be

further undermined by the persistence of loopholes, such as 100 percent forex

retention for some firms and not others, that mean that the playing field for seed

cotton purchase is not level. In the absence of strong incentives for new firms to

maintain quality, competition for seed cotton has led to quality control measures

being de-emphasised.

An initial impact of increased competition was to increase the number of

company-run input credit schemes and hence credit access for producers.

However, increased competition has also intensified side-selling of seed cotton,

which makes it more costly for companies to offer credit. In 2006-07 the

number of producers receiving some (albeit hugely varying quantities) of inputs

on credit is at a record level. However, this has only happened because

NACGMB has secured agreement that provision of inputs to producers should

be a condition for being granted an export permit for lint sales. Without such

regulatory support, provision of input credit might not be sustained under the

current, more competitive output marketing conditions.

Increased competition has raised seed cotton prices – a fact that is appreciated

by producers - but the impact on average seed cotton prices has not been as

strong as might be expected. We attribute this to the fact that the two main firms

still control around 80 percent of the market (Figure 5). New firms would have

to be larger and financially stronger than they are now to raise the average seed

cotton price received by producers season by season.

Related to this final point, looking across the whole post-liberalization period, the seed

cotton pricing performance of the Zimbabwe cotton sector has not been as strong as

had been suggested by previous evaluations (e.g. Poulton et al. 2004). In particular, the

more competitive Tanzanian sector has performed better on this indicator (Table 8), if

not on others. However, our discussion in section 5.3 suggested that some reduction in

seed cotton prices might be a fair price to pay for a sector that delivers effective pre-

harvest services to producers. These services are the key to raising production in the

Zimbabwe context and a more coordinated sector may well have greater poverty

reduction impacts than a more competitive one that fails to support producers in their

production activities.

60

Overall, the evidence presented in this report points to a clear tension between

competition and coordination in Zimbabwe - a tension that will eventually confront all

other liberalizing cotton sectors in Africa. As is already abundantly clear to leading

stakeholders in the sector, if Zimbabwe policy makers wish the national cotton industry

to maintain its historic “high yielding and high quality” profile, then some degree of

regulation is necessary to enforce this. However, as our brief discussion of the proposed

regulatory regime for 2006/07 made clear (section 6.2), care has to be taken that such

regulation does not completely remove competition from the system.

61

8 . A p p e n d i x Ta b l e s

Appendix Table 1: Ginnery Budget 2006

A) Basic Assumptions

Ginning out-turn ratio 41% bale weight (kg) 200

wastage 0.4% bales/day 225

seed loss 3% days operation per year 150

ginnery capacity (tons seed cotton/year) 25000 production (tons lint/day) 45

capacity utilisation 64% actual production of lint per year 6741

actual supplies of seed cotton per year 16050

No.of farmers served 7500 Tons/farmer 2.1

Buying posts 80 Tons/post 201

Farmer Type Served Number Acres (full package) Acres (seed+chemicals) Production Total Input Cost (US$)

Group1 2000 6 4 9600 1456000

Group2 3500 5 5250 560000

Group3 2000 2.0 1200 128000

Total 7500 16050 2144000

Input cost/acre (US$) 100 32

Yield (kg/acre) 600 300

Prefinancing rate 90% Repayment rate 90%

Month Purchased Proportion Quantity Price (Z$/kg) Price (US$/kg) Total Paid

May 0.3 4815 50000 0.18 844

June 0.3 4815 70000 0.31 1512

July 0.3 4815 85000 0.30 1449

July 0.1 1605 110000 0.39 625

16050 4431 Average 0.28

Note:All Z$ prices are converted to US$ at that month's exchange rate

62

Appendix Table 1: Ginnery Budget 2006 (continued)

B) Staffing and Financing Assumptions

Working Capital Financing Share Value (US$) Value (Z$) Rate (%) Months Repayment (Z$) Repayment (US$) Cost

Local commercial bank 0.2 886226 1.81994E+11 13% p.m. 3 262598790714 523105 -363121

External 0.8 3544903 8% p.a. 3 70898

4431129 -292223

Field Staff Number Wages (Z$ p.m.) Wages (US$ p.m.) No.of months Total

LEOs 10 300000 129.59 12 15551

Area managers 5 500000 215.98 12 12959

Temporary staff at buying posts 560 100000 43.20 4 96760

Ginnery Staff

Permanent Staff 35 500000 215.98 12 90713

Casual Labourers (Pre-Grading) 15 100000 43.20 4 2592

Casual Labourers (Ginnery) 162 100000 43.20 5 34989

125702

Notes:All Z$ prices are converted to US$ at that month's exchange rate.

Temporary staff costs are based on January 2007 wage cost; other staff costs are based on assumed multiples of this.

Interest rate on loans from Zimbabwe commercial banks = 450% p.a., i.e. negative real rate, but companies are constrained as to the quantity they can obtain from this

source.

C) Sales Price Assumptions Used in Baseline Scenarios

Price (US$/kg)

Domestic Sales (ex-ginnery) 0.86 Z$/kg 3000

A Index 1.28 US$/lb 0.58

Premium ($/lb) Share

0.07 1.43 0.05

0.05 1.39 0.1

0.03 1.34 0.4

0 1.28 0.45

64

Appendix Table 1: Ginnery Budget 2006 (continued)

D) Budget for Seed Cotton Purchase, Ginning and Sale

cost/kg seed cotton

cost/kg lint cotton

US$ US$

Salaries of permanent field staff 0.002

Vehicle depreciation 0.001 years 5

Fuel 0.0015 US$/litre 1

Interest Loss on Input Credit 0.033

Loan Default 0.012

Temporary staff at buying posts 0.006

Buying post licences (to district council) 0.002 Cost (Z$) 1000000

Woolpacks 0.002 Cost (Z$) 500000

Transport of seed cotton to buying post 0.001 Cost (Z$) 40000

purchase price of seed cotton 0.28

Transport: buying post to depot 0.01 Z$/bale/km 15000 av.distance 25

Transport: depot to ginnery 0.02 Z$/ton/km 42500 av.distance 85

financing cost -0.018

cost at ginnery gate 0.34 0.84

ginnery costs

amortization of ginnery 0.015 cost (US$) 1000000 years 10

amortization of construction 0.002 cost (US$) 300000 years 20

amortization of warehouse 0.001 cost (US$) 200000 years 20

energy 0.0004

casual salary 0.006

permanent staff 0.013

maintenance cost 0.02 WCA cost

packaging 0.02 US$/bale 4.5

capital cost (Total Cost/2 * interest) 0.009

overhead (20% of total company costs) 0.05 O/H rate 20%

total ginnery costs 0.138

value of seed sale (deduct) 0.13 seed P 95 US$/ton

total cost ex factory (f.o.t.) 0.845 US$/lb 0.38

transport costs (depot to f.o.b.) 0.132 US$/lb 0.06

Agency commissions/Zimtrade surcharges 0.0253 US$/lb 0.0115

f.o.b. cost 1.003 US$/lb 0.46

sea freight 0.055 US$/lb 0.025

cfr cost (Far East) 1.058 US$/lb 0.48

Notes:All Z$ prices are converted to US$ at that month's exchange rate.

Interest loss assumes interest rate charged to farmers is well below inflation.

Permanent staff includes ginnery management, but not HQ (included in overhead)

65

Appendix Table 2: Budget for Farmer Group 1

A) Assumptions

No.of acres cultivated 20

No.of acres fertilised 10 Yield (kg/acre) 700

No.of acres unfertilised 10 Yield (kg/acre) 400

Total quantity produced (kg) 11000

Fertilisation Inorganic fertiliser and manure on separate portions of plot(s)

Sales strategy initial sale for school fees etc, then wait for price to rise before selling remainder

Month Qty Sold (kg) Price (Z$/kg) Price (US$/kg) Revenue (US$)

May-06 1000 50000 0.18 175.28

Jun-06 8000 70000 0.31 2512.80

Jul-06 2000 105000 0.37 743.73

Total 3431.82

Average Price (US$/kg) 0.31

Wage rate (US$/day) 1

Production Practices

Manure Application on fields where no inorganic fertiliser applied, every three years during pre-season

Land Preparation own plough, family labour, off-season

Planting row planting, family labour

Basal Fertiliser family labour, at planting

Weeding hired labour Times/season 4

Top Dressing family labour

Spraying own pump Times/season 8

Harvesting hired labour

Transport own cart

Clearing old plants hired labour, by August 15th deadline

66

Appendix Table 2: Budget for Farmer Group 1 (continued)

B) Budget for Acre with Inorganic Fertiliser

Units Unit Cost (Z$)

No.of Units Total (Z$) Month

Total (US$) Notes

Family/Management Time

Land Preparation mandays 1 1 span, 2 people * 4 hours

Planting + Basal Fertiliser mandays 1 4 people * 2 hours

Weeding mandays 4 supervision

Top Dressing mandays 0.5 2 people * 2 hours

Spraying mandays 2 2 hours per spray (one person can spray 4 acres per day)

Harvesting mandays 4 3 workers + manager each doing 2 sacks per day

Transport mandays 1

Clearing old plants mandays 0 no need for supervision - just check that job done?

TOTAL 13.5

Hired Labour, Services or Opportunity Cost

Land Preparation plough opp cost 10000 1 10000 Nov-06 7.12 ploughs are hired in Gokwe

Weeding cultivator opp cost 3333 1 3333 Nov-06 2.37 quicker work than ploughing

Weeding line 100 280 28000 Feb-07 8.07 assumes cultivator used; paid by row, does not vary by weeding

Spraying pump opp cost 3.2 Tz figure, but no market for services in Zim

Harvesting kg 5000 525 2625000 Jun-06 11.78

Transport (field-house) cart opp.cost 500 1.4 700 Nov-06 0.50 cart can carry 500kg

Clearing old plants line 50 70 3500 Sep-06 6.19

TOTAL 39.23

Input Costs

Seed kg 1650 10 16500 Nov-06 11.74

Basal Fertiliser (Compound L) 50kg bag 106000 1.6 169600 Feb-07 48.88 four bags per hectare

Top Dressing (AN) 50kg bag 68000 0.8 54400 Feb-07 15.68 two bags per hectare

Pesticide bottle 8000 8 64000 Feb-07 18.44 one bottle sufficient to spray a hectare; price at which gp1 farmers sell chemicals on

TOTAL 94.74

67

Appendix Table 2: Budget for Farmer Group 1 (continued)

C) Budget for Acre with Manure

Units Unit Cost (Z$)

No.of Units

Total (Z$) Month

Total (US$) Notes

Family/Management Time

Manure Application mandays 2 total 4 people * 3 days every 3 years; assumed two are hired

Land Preparation mandays 1 1 span, 2 people * 4 hours

Planting mandays 0.75 3 people * 2 hours

Weeding mandays 4 supervision

Spraying mandays 2 2 hours per spray (one person can spray 4 acres per day)

Harvesting mandays 2.3 3 workers + manager each doing 2 sacks per day

Transport mandays 1

Clearing old plants mandays 0 no need for supervision - just check that job done?

TOTAL 11.0

Hired Labour, Services or Opportunity Cost

Manure Application mandays 2 2 total 4 people * 3 days every 3 years; assumed two are hired

Manure Application cart opp.cost 500 2 1000 Nov-06 0.71 6 cartloads per acre every 3 years @ Z$500 per load

Land Preparation plough opp cost 10000 1 10000 Nov-06 7.12 lower figure than Tanz - many own ploughs, no market for services

Weeding cultivator opp cost 3333 1 3333 Nov-06 2.37 quicker work than ploughing

Weeding line 100 280 28000 Feb-07 8.07 assumes cultivator used; paid by row, does not vary by weeding

Spraying pump opp cost 3.2 Tz figure, but no market for services in Zim

Harvesting kg 5000 300 1500000 Jun-06 6.73

Transport (field-house) cart opp.cost 500 0.8 400 Nov-06 0.28 cart can carry 500kg

Clearing old plants line 50 70 3500 Sep-06 6.19

TOTAL 33.97

Input Costs

Manure no market for manure

Seed kg 1650 10 16500 Nov-06 11.74

Pesticide bottle 8000 8 64000 Feb-07 18.44 As for budget with inorganic fertiliser

TOTAL 30.19

68

Appendix Table 3: Budget for Farmer Group 2

A) Assumptions

No.of acres cultivated 7.5

Yield (kg/acre) 320

Sales strategy sell enough to repay loan, then wait to sell remainder

Month Qty Sold (kg) Price (Z$/kg) Price (US$/kg) Revenue (US$)

May-06 500 50000 0.18 87.64

Jun-06 1900 70000 0.31 596.79

Total 684.43

Average Price (US$/kg) 0.29

Wage rate (US$/day) 1

Production Practices

Manure Application no

Land Preparation own plough, family labour, off-season

Planting row planting, family labour

Basal Fertiliser family labour, done at planting

Weeding family + hired labour Times/season 3

Top Dressing none obtained

Spraying own pump Times/season 7

Harvesting hired labour

Transport own cart

Clearing old plants hired labour, by August 15th deadline

69

Appendix Table 3: Budget for Farmer Group 2 (continued)

B) Budget per Acre

Units Unit Cost (Z$)

No.of Units

Total (Z$) Month

Total (US$) Notes

Family/Management Time

Land Preparation mandays 1 1 span, 2 people * 4 hours

Planting + Basal Fertiliser mandays 1 4 people * 2 hours

Weeding mandays 9 3 family + 1 hired for 3 days

Spraying mandays 1.75 2 hours per spray (one person can spray 4 acres per day)

Harvesting mandays 1.8 3 workers + manager each doing 2 sacks per day

Transport mandays 1

Clearing old plants mandays 0 no need for supervision - just check that job done?

TOTAL 15.6

Hired Labour, Services or Opportunity Cost

Land Preparation plough opp cost 10000 1 10000 Nov-06 7.12 ploughs are hired in Gokwe

Weeding line 200 54 10800 Feb-07 3.11 6 lines/day without cultivator; more expensive per row than if cultivator used

Spraying pump opp cost 2.8 Tz figure, but no market for services in Zim

Harvesting kg 5000 240 1200000 Jun-06 5.38

Transport (field-house) cart opp.cost 500 0.64 320 Nov-06 0.23 cart can carry 500kg

Clearing old plants line 50 70 3500 Sep-06 6.19

TOTAL 24.84

Input Costs

Seed kg 1650 10 16500 Nov-06 11.74

Basal Fertiliser (Compound L) 50kg bag 106000 0.27 28267 Feb-07 8.15 two bags per farmer

Pesticide bottle 8000 7 56000 Feb-07 16.14 one bottle sufficient to spray a hectare; price at which gp1 farmers sell chemicals on

TOTAL 36.03

70

Appendix Table 4: Budget for Farmer Group 3 (Young Households)

A) Assumptions

No.of acres cultivated 2

Yield (kg/acre) 240

Sales strategy sell immediately

Month Qty Sold (kg) Price (Z$/kg) Price (US$/kg) Revenue (US$)

May-06 250 50000 0.18 43.82

Jun-06 230 70000 0.31 72.24

116.06

Average Price (US$/kg) 0.24

Wage rate (US$/day) 1

Production Practices

Manure Application no

Land Preparation assist equipment owner to plough his land, then borrow plough for own (late)

Planting row planting, family labour

Basal Fertiliser none

Weeding family labour Times/season 3

Top Dressing none

Spraying borrow pump Times/season 5

Harvesting family labour

Transport headloading

Clearing old plants family labour, by August 15th deadline

71

Appendix Table 4: Budget for Farmer Group 3 (continued)

B) Budget per Acre

Units

Unit Cost (Z$)

No.of Units

Total (Z$) Month

Total (US$) Notes

Family/Management Time

Land Preparation mandays 2 assist equipment owner to plough his land, then borrow plough for own (late)

Planting mandays 0.5 2 people * 2 hours

Weeding mandays 30 2 people * 5 days per weeding (without cultivator)

Spraying mandays 2.5 2 hours per spray; spray for sprayer owner first

Harvesting mandays 5.5 2 sacks per person per day

Transport mandays 1

Clearing old plants mandays 1

TOTAL 42.5

Hired Labour, Services or Opportunity Cost

none

TOTAL 0.00

Input Costs

Seed kg 1650 10 16500 Nov-06 11.74

Pesticide bottle 8000 3.33 26667 Feb-07 7.68 one bottle sufficient to spray one hectare, but stretched to cover more

TOTAL 19.43

72

Appendix Table 5: Exchange Rates Used in Budget Calculations

Weighting

Year Month Official Parallel 1 Parallel 2 “Parallel” Official “Parallel” Effective

2006 January 91387 110000 100000 105000 0.3 0.7 103260

February 98695 140000 170000 155000 0.3 0.7 138260

March 99106 210000 215000 212500 0.3 0.7 178510

April 99021 215000 220000 217500 0.3 0.7 182116

May 101040 220000 280000 250000 0.3 0.7 205359

June 101011 250000 300000 275000 0.3 0.7 222859

July 101065 300000 420000 360000 0.3 0.7 282359

August 250 600 620 610 0.3 0.7 502

September 250 700 700 700 0.3 0.7 565

October 250 1400 1200 1300 0.3 0.7 985

November 250 2100 1700 1900 0.3 0.7 1405

December 250 2800 2750 2775 0.3 0.7 2018

2007 January 250 3400 3000 3200 0.3 0.7 2315

February 250 4700 5000 4850 0.3 0.7 3470

Sources: RBZ, private sources

Appendix Table 6: PPP Conversion Factors 2001 2002 2003 2004 2005 2006

1 GDP (US$bn) 12.9 30.9 10.5 4.7 4.5 8.2

2 GDP PPP (US$bn) 36.7 35.7 32.6 32.1 30.6 29.7

3 GDP per capita (US$) 1104 2652 894 401 383 700

4 GDP per capita PPP (US$) 3145 3068 2776 2737 2607 2534

Average

PPP factor (1) = 2/1 2.84 1.16 3.10 6.83 6.80 3.62 4.06

PPP factor (2) = 4/3 2.85 1.16 3.11 6.83 6.81 3.62 4.06

Source: http://www.dfat.gov.au/geo/fs/zimb.pdf (downloaded 16/3/2007)

Note: 2006 data are IMF estimates

73

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75

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